Same Google, but cheaper: a risk worth taking in US credit

US swap spreads are so unusually negative that hedging high-quality dollar credit with swaps currently offers more attractive compensation than hedging with Treasury futures, despite the risk of further divergence.

• Alphabet’s AA-rated 20-year bond traded at about 90 basis points over US Treasuries on 25 September 2026, but around 150 basis points over interest rate swaps, making it look closer to a BBB credit on the latter measure.
• M&G argues that large Treasury supply and concerns about US budget deficits have pushed government yields above the swap curve, so swaps are currently a better approximation of the dollar risk-free rate.
• In August, the team sold euro-denominated Google bonds yielding roughly 110 basis points over relevant government bonds and bought dollar bonds that offered about 170 basis points over swaps after hedging, versus roughly 100 basis points over Treasuries before the hedge.
• Similar switches from Aegon and Rothesay into Allianz and Munich Re improved portfolio quality while giving up little income.
• The strategy carries swap-spread risk: 10-year US swap spreads were about -40 basis points and 30-year spreads about -70 basis points, compared with roughly +60 basis points at 10 years before the financial crisis and after allowing for about 25 basis points from the LIBOR-to-SOFR transition.

Takeaway: M&G considers the extra 40 to 70 basis points sufficient compensation for swap-spread risk because spreads are already at or beyond post-2008 extremes, while acknowledging that the position may be early and that further widening could cause mark-to-market losses.