I wanted to understand how I can use Z-spreads in the context of gov bond RV.

I understand how to compute Z-spreads although I am having some trouble interpreting the meaning. I am solving for the amount I need to shift the ZC swap curve in order to reprice the particular bond in question correctly (as given by the market price).

Say I have one bond (A) with a z-spread of +50bps and another similar maturity bond (B) with a spread of +20bps. Does this imply the swap market is actually saying: on the raw swap curve (i.e. unbumped) the pv of A is very high, relative to the market price therefore to reduce it to the market price the discount rates must be increased? In this sense, this bond is actually richer than B which only has a spread of +20bps?

thanks.

• Other way around. You have to move the curve up 50bp to reprice bond A , versus only 20bp for bond B. So A must be relatively cheap.
– dm63
Aug 4, 2023 at 19:37
• Thank you, makes sense. Maybe as a follow up - is it typically more common to compare bonds with similar duration or maturity on a z-sprd basis? Aug 4, 2023 at 20:43
• Definitely duration
– dm63
Aug 5, 2023 at 3:24
• is the mkt convention to add the z-spread onto ZC rates or subtract? I see Tuckmans book has it as subtract. My example above was based on todays US curve, i.e. bonds are cheaper (yield more) then swaps -> therefore, I need to shift up the ZC swap curve by say +50bps to get the bond PV, therefore I would say the z-sprd is +50bps. Whereas following Tuckmans formulae (arguable he's talking about TED spreads) it would be -50bps. Aug 5, 2023 at 8:59
• As you said, in current market z spread of Treasuries versus swaps is positive. Prior to 2008 was negative. Reason = massive issuance of Treasuries.
– dm63
Aug 5, 2023 at 11:40