the financial institution pays can be computed. Alternatively, the financial institution can synthetically create a fixed-rate funding arrangement by entering into a 3-year swap in which it pays fixed and receives 3-month LIBOR. Other things equal, the financial institution will use the vehicle that delivers the lowest cost of hedging the mismatched position. That is, the financial institution will compare the syn- thetic fixed rate (expressed as a percentage over U.S. Treasuries) to the 3- year swap spread. The difference between the synthetic spread and the swap spread should be within a few basis points under normal circumstances. For swaps with tenors greater than five years, we cannot rely on the Eurodollar CD futures due to diminishing liquidity of such contracts. Instead, longer-dated swaps are priced using rates available for invest- ment-grade corporate borrowers in fixed-rate and floating-rate debt mar- kets. Since a swap can be interpreted as a package of long and short positions in a fixed-rate bond and a floating-rate bond, it is the credit spreads in those two market sectors that will be the primary determinant of the swap spread. Empirically, the swap curve lies above the U.S. Trea- sury yield curve and below the on-the-run yield curve for AA-rated banks.6 Swap fixed rates are lower than AA-rated bond yields because their lower credit due to netting and offsetting of swap positions. In addition, there are a number of other technical factors that influ- ence the level of swap spreads.7While the impact of some these factors is ephemeral, their influence can be considerable in the short run. Included among these factors are: (1) the level and shape of the Treasury yield curve; (2) the relative supply of fixed- and floating-rate payers in the interest rate swap market; (3) the technical factors that affect swap deal- ers; and (4) the level of asset-based swap activity.     6For a discussion of this point, see Andrew R. Young, A Morgan Stanley Guide to Fixed Income Analysis (New York: Morgan Stanley, 1997). 7See Ellen L. Evans and Gioia Parente Bales, "What Drives Interest Rate Swap Spreads," Chapter 13 in Carl R. Beidleman (ed.), Interest Rate Swaps (Burr Ridge, IL: Irwin Professional Publishing, 1991).     The level, slope, and curvature of the U.S. Treasury yield is an important influence on swap spreads at various maturities. The reason is that embed- ded in the yield curve are the markets expectations of the direction of future interest rates. While these expectations are sometimes challenging to extract, the decision to borrow at a fixed-rate or a floating-rate will be based, in part, on these expectations. The relative supply of fixed- and floating-rate payers in the interest rate swap market should also be influenced by these expecta- tions. For example, many corporate issuers-financial institutions and fed- eral agencies in particular-swap their newly issued fixed-rate debt into floating using the swap market. Consequently, swap spreads will be affected