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:
- PIMCO’s Everything You Need to Know About Bonds
- WSO’s What is a Bond?
- FINRA's What You Need to Know About Bond Spreads
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.
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.
Whoops... misread the title. Got a little excited there.
Government and Corporate Bond spreads (Originally Posted: 12/03/2008)
I am a Junior finance major at Morehouse College who is interested in pursuing banking. With that having been said, I watch alot of CNBC on top of a whole lot of reading to get a grasp and the functions of the market.
When I was watching CNBC today one of the guys on squawk box noted that the spread between government-issued corporate bonds were at there highest and also noted that in respect to the 5-yr Treasury, it had a 1.716% yield at 60.5 basis points.
What exactly does all of that mean and where can I find more information specifically on the relationships between bonds and their yields?
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...
quick google found this, but I know there's better info out there. http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aec7wvoK…
youngmoney -
I was NEVER a finance undergraduate in college. So, technically I was NEVER there.
Believe me. If he asked that on a desk, he'd be yelled at much more harshly.
Ymdeutsch, sorry but... this is NOT a trading desk.
I think you're one of those people that enjoy being a jackass to others... I feel sorry for you.
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.
I haven't taken any finance courses yet because I just completed my poli-sci minor ymdeutsch.
I understand the bond price/bond yield relationship
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?
...market expectations and time.
your essentially asking what causes the she shape of the yield curve.
expectations of inflation/deflation (economic growth or decline) is key and when these events are supposed to occur and to what degree.
http://www.investmentu.com/wp-content/uploads/2008/03/20060102.jpg
in the above picture who knows what was expected to drop the 5 year yield down from the two year (inverted yield)... probably belief we would see a period of declining economic growth and plummeting interest rates during that period... :0)
g-spread and other bond spread pricing vs z-spread and others (Originally Posted: 06/10/2012)
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?
Thanks!
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