Why Treasury Bond Option-Adjusted Spreads Can Differ

Summary

The document asks whether two bonds with the same maturity but different coupons should have matching option-adjusted spreads when their yields are calculated using the same Treasury zero-coupon curve. It highlights a potential mismatch between discounting cash flows and interpreting a market spread measure: sharing a reference curve does not make the bonds identical in liquidity or trading characteristics.

One response offers liquidity as a possible source of a spread difference, contrasting a recently issued bond with an older issue. Another answer states that properly discounted Treasuries should have neither a zero-volatility spread nor an option-adjusted spread. The discussion is sparse and does not show Bloomberg inputs, bond prices, cash-flow calculations, or the details of its OAS model. It therefore flags liquidity and instrument specifics as considerations but does not fully resolve the reported discrepancy or establish that coupon effects alone explain the results.

Key ideas

• Using the same Treasury curve does not ensure that two bonds will have matching market spreads.
• Liquidity differences between new and older issues may affect observed pricing.
• The responses assert that correctly discounted Treasuries should have no Z-spread or OAS.
• The discussion lacks sufficient pricing and model details to diagnose the specific Bloomberg result.

Tags

# Treasury zero coupon curve for discounting two bonds but OAS different on Bloomberg


# Treasury zero coupon curve for discounting two bonds but OAS different on Bloomberg












Using zero coupon Treasury curve, I discounted a 10% coupon bond. Using the same curve, I discounted a 5% coupon bond. Both these bonds have the same maturity. Since I discount both these bonds using the same curve, I should get two yields where the difference reflects the coupon effect.

I put in these two yields into Bloomberg and theoretically the OAS on both of them should match but it doesn't. Shouldn't the OAS match because the coupon effect is already accounted for. What would them be different?

## Answer by Charles Fox (score 0)

https://quant.stackexchange.com/a/53622

The pricing could be different for other reasons. For example, a 10 year bond issued this week will likely be more liquidity traded than a 30 year bond issued 20 years ago. The newly issued bond may have a liquidity premium.

## Answer by Edward Watson (score -2)

https://quant.stackexchange.com/a/64154

Treasuries properly discounted should have no z spread and oas.

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