I have a 2 year maturity AA rated US corporate bonds, and I found that it has negative Z-spread, -0.00053. Does it make sense or it's wrong?
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1$\begingroup$ Without any further information I think it’s probably wrong. Also the fact you have included so many decimal places and haven’t included any units (pct, bp) looks strange. $\endgroup$– dm63Jun 11, 2022 at 11:12
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Yes, it's possible for an IG bond to be trading at a small negative Z-spread.
Z-spread is a spread to LIBOR. LIBOR is above treasury because it includes a tiny bit of "common banks" credit risk.
It's also possible that your bond has some features, such as collateral, that make the bond more valuable, but that the Z-spread calculation doen't take into account. Z-spread just looks at the cash flows if the bond does not default, not at probability of default and loss given default.
answered Jun 11, 2022 at 11:17