Would appreciate a clear explanation as to what the OIS/Tsy spread and the TU OIS spread is. I've seen it being talked about in Wall St research reports but can't seem to find good explanations on Google. Can anyone shed some light on this and refer any good sources for learning?

Also, it seems like the spread is negative right now. Does it mean the convention is to quote the spread as the lower OIS rate minus the higher Treasury or futures rate? Is there any intuition behind this? Also, when lingo talks about cheapening/tightening/widening of spreads, which direction is this referring to? Heading to 0 or becoming more negative?

Any additional information would also be much appreciated. Thank you!

Sample report: https://www.tdsresearch.com/currency-rates/viewEmailFile.action?eKey=GOB4FJARFMNGIV98LO4X3RMHX


Treasury / OIS spread is simply the difference between a given Treasury bond's yield (typically the on-the-run Treasuries, like 2y, 5y, etc.) and the fixed rate on an OIS of a similar tenor. If you consider OIS to be a decent proxy for repo rates, the Treasury / OIS spread is a way of gauging how cheap / rich Treasuries are versus their funding.

Typically, to be "long the spread" is to buy the bond and pay fixed in an OIS - this is why the spread is typically quoted as $ r - y $, where $ r $ is the fixed rate on the swap and $ y $ is the yield on the bond. If you're long the spread, you want $ r $ to go up or $ y $ to go down.

Widening / tightening are the same as long / short, but that terminology can be a bit confusing when spreads are negative, which is why it's usually easier to just talk in terms of long or short - if I'm long something then I want that something to increase - in this case, that is the difference between the swap rate and bond yield.

  • $\begingroup$ Do you know why this Treausry/OIS is the popular spread, instead of quoting something like the repo/Treasury spread? Thanks for your answer! Sheds a lot of clarity! $\endgroup$
    – Zen'z
    Sep 19 '19 at 1:06
  • $\begingroup$ One reason is that quoted repo is relatively short dated - it is only liquid out to a few months. In contrast, OIS is quoted significantly farther out, so it can match the maturity of the bond. $\endgroup$
    – thetableed
    Sep 19 '19 at 3:56

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