Pricing: G / I / Z / OAS / ASW Spreads and NIC
Open a Bloomberg YAS screen and you'll see at least five different spread numbers for a single bond simultaneously. Why five? Because each answers a different question. This chapter fully dissects G/I/Z/OAS/ASW differences and the economics of NIC with worked examples.
Want to understand the SOFR/LIBOR transition and what Mid-Swap really is?
DCM Special — SOFR, LIBOR, Mid-Swap & CCS Deep-Dive →Why Are Five Spread Measures Needed?
All spreads share the same core purpose: expressing 'how risky is this bond?' as a number. But there are multiple perspectives on what 'risk' means and how to measure it.
"How much vs. govt bonds?"
→ G-spread (vs. Treasuries)
"How much vs. the swap curve?"
→ I-spread (vs. IRS fixed rate)
"Accounting for the full curve?"
→ Z-spread (zero-coupon curve discounting)
"Strip out the option — then what?"
→ OAS (option value stripped out)
"If I hedge to floating — how much?"
→ ASW (floating spread post-swap)
In practice, bankers choose the appropriate spread for the deal type. G-spread for USD IG, I-spread for EUR Eurobonds, OAS for comparing AT1 or callable bonds, Z-spread for precise structured product analysis, ASW for managing hedged positions. Using the wrong one creates communication confusion with investors.
Five Spread Types — Complete Breakdown
Formula, usage context, pros/cons, and worked examples — with reasoning for why each matters
Bond YTM − same-tenor government bond YTMT+180bp → UST 5yr at 4.20% → Bond YTM = 6.00%
Bond YTM − same-tenor interest rate swap (IRS) fixed rateEUR 5yr IRS at 3.10% → Bond YTM 3.90% → I-Spread = 80bp
Z that equates the bond's PV (discounting at swap zero-coupon curve + Z) to market priceCLO AAA tranche: Z-spread 130bp vs G-spread 140bp (curve steepness 반영)
Z-Spread minus embedded option value (bp) = pure credit spread net of optionAT1 Z-spread 580bp − call option value 120bp = OAS 460bp
Floating rate add-on (vs SOFR/EURIBOR) when swapping bond's fixed coupon to floatingIG bond ASW = SOFR+85bp → 변동금리 투자자가 이 채권을 헤지하면 85bp 획득
From IPT to Final Spread — How Price Is Set
On deal day morning, the 2–4 hour real-world pricing mechanism
IPT (Initial Price Thoughts) is the 'opening bid' set by the Syndicate desk. Too tight and there aren't enough investor orders; too wide and the issuer pays unnecessary cost. Setting IPT means estimating the market's acceptable range, using comparable analysis (comps) and pilot fishing results.
T+200bp areaSyndicate communicates IPT to investors via Sales. 'Area' signals the final price will land around this number. Investors begin submitting orders after internal approval.
T+185bp areaWhen the book hits 2-3x coverage, Syndicate tightens. This announcement causes some investors to withdraw (too tight) while others increase orders. It's also a test of order book 'quality.'
T+175bpThe 'area' qualifier disappears — a fixed spread is announced. Investors confirm final order sizes at this price. After this point, order changes require Syndicate approval.
T+175bp | NIC = 10bpOrder book closes and allocation is decided. Final deal size is also set (upsizing possible). Results are communicated to investors and the Term Sheet is distributed.
Tightening Analysis: In this example, spread tightened 25bp from IPT T+200bp to final T+175bp. The issuer provided 10bp NIC above the comp level of T+165bp. Result: investors received fair premium vs. comps, issuer raised funds in good market conditions, and the bond traded at T+168bp in secondary post-launch — meeting the 'successful deal' criteria.
Average NIC Guide by Issuer Type
Practical benchmarks for NIC demanded by investors, by credit rating and issuer type
NIC is not a fixed number. It varies with market conditions (volatility, supply/demand), the issuer's credit history, issuance frequency, and current spread levels. The ranges below are rough benchmarks for stable market conditions — during market stress they can expand 2-3x across the board.
| Issuer Type | Typical NIC | Rationale |
|---|---|---|
| AAA SSA (Korea Sovereign, KDB) | 1–5bp | Large, trusted investor pool allows minimal NIC |
| A-rated FIG Senior (Major Bank) | 3–8bp | Named bank but heavy supply requires modest NIC |
| BBB Corporate (IG floor) | 5–12bp | Fallen Angel perception + demand uncertainty |
| BB High Yield | 12.5–25bp | Narrow investor pool, risk premium, book uncertainty |
| AT1 (Perpetual, Bank Capital) | 25–50bp+ | Complex structure, PONV risk, perpetual premium |
Comparable Analysis (Comps) — How Bankers Estimate Fair Value
Comparable Analysis (Comp Table) estimates the fair spread for a new issuance by comparing current spreads of similar bonds. Analogous to P/E comps in equity, but bond comps require adjusting for differences in maturity, rating, structure, and liquidity.
Step 1: Same Issuer's Existing Bonds (On-the-run vs Off-the-run)
The issuer's most recent bond (on-the-run) is the most liquid and market-familiar reference. Interpolate from there to the new issue's maturity to estimate fair value. Example: if the 5yr on-the-run trades at T+160bp and you're issuing a new 7yr, accounting for the term premium you'd start around T+175bp.
Step 2: Same-Rating Peer Issuer Bonds
Compare bonds from similarly rated issuers in the same sector. Example: a BBB Korean corporate issuing 5yr bonds would use other BBB Korean corporate 5yr bonds as comps. Apply premiums or discounts based on differences in financial structure, business model, and governance.
Step 3: Sector Average and Index Levels
Check the Bloomberg or iBoxx index for average spreads in the relevant sector and rating. This provides the market-wide 'baseline.' If a specific deal's spread deviates significantly from the sector average, clear explanations are needed for investors.
Banker's Note — The Interpolation Trap: Maturity interpolation assumes the spread curve is linear. But real curves can be concave or convex. When large supply concentrates at specific maturities or investor demand clusters, spreads at those points deviate significantly from linear interpolation. These are 'knotty points.' Experienced Syndicate bankers know these deviations and adjust their comps accordingly.
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References
- 1Bank for International Settlements. Understanding the Term Structure of Interest Rates and Credit Spreads. BIS Working Papers, 2023
- 2PIMCO. Understanding Bond Spread Terminology — G-Spread, Z-Spread, OAS. PIMCO Education, 2024
- 3Federal Reserve Board. Credit Risk and the Option-Adjusted Spread. Federal Reserve, 2023
- 4Bloomberg. Fixed Income Analytics Reference Guide — Spread Calculations. Bloomberg Terminal Documentation, 2024
- 5CFA Institute. Fixed Income Analysis — Spread Measures and Their Applications. CFA Program Curriculum, 2024