Spread Measures

G-spread, I-spread, Z-spread, asset-swap spread, OAS, discount margin — six ways to answer one question: how much extra am I paid for this credit?

Why one bond has six spreads

"The bond trades 180 over" sounds precise — until you ask: over what? Over a single government bond? Over the swap curve? Over the whole curve, point by point? Each convention answers a slightly different question, and desks quote them interchangeably enough that knowing the differences is table stakes.

The family, from crude to refined

• G-spread — bond yield minus the interpolated government yield at the same maturity. Simple, universal, and blind to curve shape between the two points.
• I-spread — bond yield minus the swap rate at the same maturity. The corporate-desk default, since credit hedges live in swap-land.
• Z-spread — the constant spread that, added to every point of the reference (swap/zero) curve, reprices the bond exactly:

• Because it discounts each cash flow at its own curve point plus Z, it respects curve shape — the workhorse for anything with meaningful coupons or unusual cash-flow timing. On a flat curve, Z-spread ≈ I-spread; the steeper the curve, the more they diverge.
• Asset-swap spread (ASW) — the spread you'd actually receive above the floating rate if you bought the bond and swapped its fixed coupons to floating in an asset-swap package. A traded price, not just a calculation: it embeds the bond's price premium/discount (par-par ASW funds the difference at the floating leg) and is the natural measure for bank books that fund at floating rates.
• OAS (option-adjusted spread) — Z-spread's model-dependent sibling for bonds with embedded options (MBS, callables): run rate scenarios, value the borrower's option, subtract it. What remains is compensation for credit and liquidity only. The gap Z − OAS is the option's cost in spread terms — for current-coupon MBS often the majority of the visible spread.
• Discount margin (DM) — the floater's version: the constant margin over the projected reference rate that reprices an FRN or loan to its price. Loans and CLO tranches quote in DM.

Choosing the right measure — the desk rules

• Quick relative value between similar bullets: G- or I-spread — fast, good enough.
• Different coupons, amortising structures, off-market prices: Z-spread — the cash-flow-faithful measure.
• Anything callable, puttable or prepayable: OAS, or you're paying yourself the borrower's option and calling it yield.
• Floaters, loans, CLO paper: discount margin.
• Bank funding view / swapped-to-floating buyers: asset-swap spread — because it's what you can actually lock in.
• Against the CDS market: the basis — bond spread minus CDS premium, the arbitrage tension between cash and derivative.

Reading spreads like a professional

• Spread ≠ credit risk alone: it bundles expected default loss, a risk premium, liquidity and (uncorrected) option value. In crises the liquidity component dominates — 2008's "spreads at depression levels" partly priced the inability to sell anything, at any spread.
• Swap-spread quirks: government yields have traded above swap rates at times (negative swap spreads in long USD) — G- and I-spreads then rank bonds differently; know which your screen shows.
• Spread duration is the risk that goes with all of this — the calculator converts any of these spreads' moves into P&L.
• The pull of conventions: indices quote OAS, loan markets quote DM at a price ("S+350 at 99"), bond desks quote I-spread, and the same instrument can appear 30bp apart across screens showing different measures. The first question is always: spread over what?