This paper investigates the determinants of variations in the yield spreads (swap spreads) between Hong Kong dollar interest rate swaps and Exchange Fund paper for a period from July 2002 to April 2008. A vector error-correction model is used to analyse the impact of various shocks on swap spreads. The issue is whether "liquidity" or "credit" (or both) is the main determinant of swap spread dynamics. The results show that the dynamics are influenced significantly by "credit" between July 2002 and September 2007. However, "liquidity" between the Exchange Fund long-term notes and short-term bills is the major determinant of swap spreads between September 2007 and April 2008. The substantial demand of the Exchange Fund short-term bills, that reflected the strong preference of market participants for holding short-term instruments for liquidity purposes probably due to the sub-prime crisis in the US, is the driving force of the rise in swap spreads in the last quarter of 2007.