I am trying to build some intuition what information does I-spread provide? G-Spread and I-Spread differ as to what curve they use to evaluate the spread to. In the former it is Treasury curve and in the latter it is swap curve. I understand how the swap curve built and it represents the spot curve for swap rates of different maturities but what information it carries? Whey would one need I-spread when looking at corp bonds?
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2$\begingroup$ Well, these standards for comparison are to some extent a matter of taste. You could argue that the Govt Bond rate is not pertinent to Corporates since they don't issue govt bonds (obviously), but the Swap rate, being the fixed rate at which highly rated corporations can exchange floating for fixed debt may be a more relevant comparison for corporate debt issuance. In essence if SOFR or the old Libor was a good standard for short term borrowing, then the rate to swap SOFR for long term debt is a good standard for long term borrowing. $\endgroup$– nbbo2Commented Mar 22 at 20:20
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G spread gives one an indication of how much return relative to the risk free rate.
I spread gives one an indication of how much return relative to where banks can fund the position on a rolling basis.
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$\begingroup$ Before we switched to SOFR banks were borrowing at Libor. Now they borrow at SOFR rate, it is different from swap rate after all. I guess my question is now related to how swap rate is related to SOFR? $\endgroup$– MedanCommented Mar 23 at 18:22
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$\begingroup$ Or in other words what is the banks borrowing cost then? $\endgroup$– MedanCommented Mar 23 at 18:29
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3$\begingroup$ As you mentioned, LIBOR has been discontinued and has now been replaced by SOFR. There are SOFR, futures, swaps etc contracts analogous to all the previous LIBOR contracts. $\endgroup$– AlRacoonCommented Mar 23 at 19:01