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Hi so I'm trying to figure out how to adjust for the coupon value in the Z-Spread of a given bond. For example we can take UKRAIN 9.75 11/28. The coupon is 9.75 which is quite a bit higher than the rest of the curve (rest are around 7.5). The Z-Spread of this bond at the time of writing is 587, which is also quite a bit higher than the rest of the curve. The price, however is also much higher than the rest of the curve (115.5 approx).

I suspect there is some mis-pricing going on here on account of the high coupon being heavily bid, but not to a correct amount.

Any ideas of how I can go about this?

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In the US we can adjust coupons on treasury notes and bonds of similar maturities using strip prices (principal and interest). If we have, for example, a 2% 2/15/2030 note and a 1% 11/15/2029 note and principal strip prices for each we can take the note price and subtract the principal strip price, divide by the coupon, to get the price per 1% of coupon. We can now adjust the 1% 11/15/2029 note to have a 2% coupon and a subsequent calculated yield. Without an active strip market, a helpful way to normalize curves with bonds of different coupons is to graph yields not versus maturity but duration. Your yield curve will make much more sense that way. There's nothing really wrong with a z-spread or oas for treasury relative value other than the fact that it might not be clear what discount curve their using to create the Z spread, or the oas which also needs a discount curve. Many people will discount using another curve like libor swaps.

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  • $\begingroup$ Thanks for your response! This specific calculation I'm looking to do is on sovereign or corporate credit names in EM. So if I understand correctly, you propose I plot the yields vs the duration - but then what? The street convention is to quote in Z-Spread and so I am looking to transform the output into a Z-Spread or Coupon Adjusted Spread. If that makes sense. $\endgroup$
    – AlanTuring
    Commented May 4, 2021 at 12:02
  • $\begingroup$ I would calculate the ZSpread based on discount rates from their sovereign curve or some eur swap discount rates. It's hard to say what's going but a proper Zsprd should help compare. It could be that the bond is relatively cheap or other technical or credit issue. For the same maturity in a positively sloped yield curve, higher coupon bonds will have lower yields and appear richer. If you plot the bonds by duration it will smooth differences in coupons as the higher coupon bond with lower yields will have lower durations and you'll see that it's yield is inline with similar duration bonds. $\endgroup$
    – Edward Watson
    Commented May 5, 2021 at 12:23

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