Z-Spread to Next Call vs. OAS

nicholaihel · January 9th, 2015, 10:20 pm

For callable bonds Bloomberg calculates a z-spread to next call. Is it ok to assume that this is a measure close to OAS since it's the spread you get assuming the bond will be called? If not could someone please explain what the difference is? On the other hand, is z-spread to maturity the spread you would get if the bond is not called? Hence it includes the cost of the option as well?Thanks

bearish · January 10th, 2015, 2:11 pm

No, if you want a spread (as well as some notions of spread and interest rate duration) that is useful for decision making you really should model the call in the context of stochastic interest rates and a stochastic credit spread. Since most callable bonds these days are found in the high yield space (at least in the US market), the credit spread volatility will tend to swamp the interest rate volatility in terms of the all-in funding cost that will drive the call decision.