Why G Spreads and Z Spreads Differ Across Yield Curves
Summary
The document addresses why a bond’s G spread, measured against a government curve, can be greater than its Z spread, measured against a swap curve. Its main explanation is that the spread comparison depends on the underlying base curves, not only on conceptual spread components such as credit and reinvestment risk. When the swap curve is above the government curve at a bond’s maturity, the Z spread can be lower; where the relative curve levels reverse, the spread ordering can also reverse.
The responses offer maturity-specific examples and note that curve construction and coupon cash flows may affect the comparison. They do not establish a universal relationship: curve levels change over time, and the relevant maturity and benchmark definitions matter. The discussion includes differing explanations, so the practical lesson is to inspect the base curves used for each quoted spread and avoid inferring spread ordering from the labels alone.
Key ideas
- G spreads are calculated against a government curve, while Z spreads may use a swap curve.
- The relative levels of those base curves can determine which spread is larger.
- The ordering can vary with the bond’s maturity and prevailing curve shape.
- Spread comparisons should use the benchmark definitions shown by the pricing system.
- The explanations are context dependent and do not imply a fixed ordering.
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Full text
# Why is G spread bigger than Z spread theoretically? # Why is G spread bigger than Z spread theoretically? I am checking a few bonds on the YAS page on Bloomberg and I can see that G is higher than Z spread (this applies to bonds with optionality and bullet, too). As Z is stripped from reinvestment risk, shouldnt G be higher provided that equals credit risk + reinvestment risk? Thank you, much appreciated if anyone can clarify this for me. ## Answer by Benloper (score 5) https://quant.stackexchange.com/a/34362 Tough to answer specifically because I don't know what bonds you're looking at, but my guess is it has less to do with the spread-building blocks and more to do with the base curve. G spread is based off the interpolated government bond curve, and Z spread is off the Swap curve, if you mouse over on YAS it will show you the base curve. Since right now the swap curve is higher than the Treasury curve out to about 5/6 years, I imagine you're looking at bond inside of 5 years to maturity. That's going to drive the Z spread lower than the G. If you're looking out past 5/6 years the relationship should flip back to what you describe with a G below the Z spread. Look at something like a Verizon 30 year and you'll see that play out. ## Answer by Lior Yochpaz (score 1) https://quant.stackexchange.com/a/44563 Zero curve is always stepper than regular curve. As long as it is a positive curve. And that is the reason the Z spread is higher than the G spread. In Zero curve or spread only the last coupon is capitalize in the high interest rate. The first coupons in the cashflow capitalize with lower interest rate, so the Z spread / Zero curve is higher ## Answer by user39194 (score 0) https://quant.stackexchange.com/a/44528 Us dollar swap curve is lower than the actives curve for maturities after 20y currently. Hence your g spread would be bigger than your z in broad terms. The current spread between them for the 47s you're looking for is close to 20bps. hence the diff is spot on when i look at yas, i get 163g-spread and 182z.
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