Zero-Volatility Spread (Z-Spread) - Definition

The Z-spread, ZSPRD or Yield Curve spread on a simple mortgage-backed security (MBS) is the flat spread over the treasury yield curve required in discounting a pre-determined coupon schedule to arrive at its present market price.

Z-spreads can also be used as an Economic Indicator, where a negative z-spread often indicates a Recession is on its way. Calculating the z-spread requires trial and error to find the correct spread, using Basis points so that the present value of cash flows and the bond's price are the same.

As the Z-Spread is not dependent upon only one point on the Yield Curve and takes account of all of the relevant term-structure, the distortions of Yield-to-Maturity spreads outlined above are eliminated. It is then a measure of Credit Spread without the distortions of YTM. It is widely used in the CDS and other markets by non bond traders who want a fair reading of Credit Spread undistorted by the complexities of individual bonds.

The Z Spread is widely used as the "cash" benchmark for the calculation of the CDS Basis. The CDS basis is commonly the CDS Fee minus the Z Spread for a bond of the same maturity. For the example, 10 Year RBS CDS is currently 199.7 bps, the Z Spread for their 10 year Global bond is 286.8, giving a negative basis of -87.1bps.

Terms near "Zero-Volatility Spread (Z-Spread)"

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