g-spread and other bond spreads

Trying to understand bond spreads pricing... can someone explain to me what the g-spread is in particular? Also, how does it compare with the Z-spread and other bond spreads?

What Are Spreads?

A spread is simply the difference in price between two assets. Those of us who have ever studied for a CFA exam, taken a finance class in undergrad or b-school, or worked in the industry (aka everyone on this forum), you know there’s more to spreads than this.

How Are Bonds Priced – A Review

We’ll spare you an elementary review of the inverse relationship between bond prices and yields, but if you need more information here are a few links we recommend:

How Do Bond Spreads Differ?

Each spread has a different calculation and is designed to give you information about different parts of the bond market. WSO community members explain definitions and calculations for a few common spreads:

  • T-spread is the spread over the actual Treasury benchmark bond
  • G-spread, or nominal spread, is the spread over the exact interpolated point on the Treasury curve. (e.g. if I have a corporate bond maturing June 15, 2018 and it is yielding 3%, and it is quoted over the 5-year Treasury yielding 1% and maturing on May 31, 2017, then the corporate bond has a T-spread of 200bps. However, assuming the Treasury curve is upward sloping, it will have a lower G-spread because the point on the government curve corresponding to June 15, 2018, will be greater than 1%.)
  • I-spread is the interpolated spread over the actual swap curve
  • With the Z-spread, each coupon and principal payment is brought to present value with the treasury curve + the z spread. The z - spread is therefore an iteration, calculated for the present value of a bond to equal its market value

Why Are Spreads Important?

When it comes to spreads, it’s the changes that matter. Spreads widening or tightening can signal changes in the economy, liquidity, credit risk or health of different assets. You’re likely to see spreads widen if the economy weakens or risks increase. Vice versa, you’ll likely see spreads tighten as the economy improves or risk lessens.

 
Best Response

T-spread is the spread over the actual Treasury benchmark bond.

G-spread is the spread over the exact interpolated point on the Treasury curve.

e.g. if I have a corporate bond maturing June 15, 2018 and it is yielding 3%, and it is quoted over the 5-year Treasury yielding 1% and maturing on May 31, 2017, then the corporate bond has a T-spread of 200bps. However, assuming the Treasury curve is upward sloping, it will have a lower G-spread because the point on the government curve corresponding to June 15, 2018, will be greater than 1%.

I-spread is the interpolated spread over the actual swap curve.

Z-spread, I believe, is the spread over the zero-coupon swap curve which makes it more theoretically correct than the I-spread.

 

I believe you are not correct with regards to the Z-spread. With the Z-spread, each coupon and principal payment is brought to present value with the treasury curve + the z spread. The z - spread is therefore an iteration, calculated for the present value of a bond to equal its market value.

 

I think your problem is a result of 2 things:

1) Not actually opening up your finance textbooks in the classes you take.

2) An overall fear of mathematics, numbers, and the percent sign (%) that most undergraduate finance majors struggle with.

The only other thing I can think of is that you have never heard of Google (www.google.com) or Wikipedia (www.wikipedia.org).

 

ymdeutsch... why so harsh? he's just asking a question... true, there's ways of finding the answer to that, but no point is getting aggressive. And i'd say most finance undergrads are relatively confident with the % sign. You weren't there that long ago...

 

supply and demand. as demand increases for something the price increases and yields go down.

economic uncertainty and market panic has caused people to flee the equity and private debt markets because they fear that many companies are at risk of going under; decreased demand -> decreased price -> much higher yields.

all this money flees to a perceived risk free investment, government debt. the increased demand causes the price of the gov't debt to rise and their yields to drop.

thus where we are today and the answer to your question.


have to agree with the second poster though, you should know this if you are a finance major... or its just one more good example of why I think economics breeds smarter graduates (while not as technically skilled) than finance.

 

Thanks for all of your help... maybe i should've been a little more specific.

  1. I haven't taken any finance courses yet because I just completed my poli-sci minor ymdeutsch.

  2. I understand the bond price/bond yield relationship

  3. I've been reading this book called the 'Bond Book' and it is helpful, but what I'm more interested in are the reasons behind these numbers? Why would that specific number (1.713% at 60.5 bps) is not a good one. What exactly causes a difference in the yields and prices between a 5 yr treasury note vs. 2, 3 or 10 yrs. How do these relationships affect eachother? Outside of the equities market, what other factors influence T-note rates? (ie- How does the report of lower manufacturing affect t-notes? Do they even have an influence?)....

Google and wikipedia don't really seem to have a real-time answer for my questions... So again, are there any resources that can help answer these questions?... I heard that PIMCO has pretty good info, but I really want an in-depth technical analysis that would really explain the numbers...

Anyone catch my drift?

 

Hic voluptatem occaecati esse dolorum illo illum. Voluptate quisquam temporibus et voluptate a voluptatem. Consequatur repellat exercitationem autem dolores. Cumque autem consequatur cupiditate aut numquam.

Nam ab quia consequuntur et ullam. Facere laudantium unde quidem cumque inventore. Facilis nemo doloribus est. Veniam iusto molestiae excepturi.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
kanon's picture
kanon
98.9
6
CompBanker's picture
CompBanker
98.9
7
dosk17's picture
dosk17
98.9
8
DrApeman's picture
DrApeman
98.9
9
GameTheory's picture
GameTheory
98.9
10
bolo up's picture
bolo up
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”