Hi, I've been getting myself in a muddle in deriving discount factors from OIS curves and would be grateful for any pointers.

I think my problem boils down to: "When deriving the discount factor/zero rate from a par OIS rate do you include the pay lag?" but I've left an example (that I derived from bloomberg) below.

For example from Bloomberg

The 2W USD OIS swap;

Effective 20-Apr-17

Maturity 04-May-17 (14 Actual days from Effective date)

Payment 08-May-2017 (18 Actual days from Effective date, +2 pay lag from maturity)

Coupon: 89 basis points

If I use this rate to make a discount factor, am I getting the discount factor to the 4th or 8th May?

If it's the 4th May then, the zero rate is the same as the par rate around 0.89

If it's the 8th May then, the extra two days makes the zero rate around 62bps which is what bloomberg gives for the zero coupon price and the discount factor

As it's paid on the 8th I understand if it would be to the 8th may but I don't get the fundamentals behind how a zero rate of 62 basis points makes any sense when effective fed funds is >90 and is expected to increase? Wouldn't that additional compensation for the pay lag been included in the price?

I appreciate that this is really only a material problem with the front end as the pay lag is a greater proportion of it there but it's been doing my head in for a while so I'd be grateful for anything that can settle this.

Thanks, AWC