OAS (Option-Adjusted Spread)
The spread of a bond over the risk-free curve after stripping out the value of embedded options (call, put, prepayment).
Definition
OAS isolates pure credit risk by removing optionality. For callable corporate bonds it strips the call value; for MBS it strips prepayment optionality. OAS makes bonds with different structures directly comparable.
It's the standard spread metric used in institutional credit and MBS analysis.
Public research record
Research framework · page evidenceCompleted application: OAS (Option-Adjusted Spread)
Comparing nominal spreads across callable and non-callable bonds is misleading; OAS is the only apples-to-apples credit signal.
| Type | Claim | Scope |
|---|---|---|
| Release fact | The spread of a bond over the risk-free curve after stripping out the value of embedded options (call, put, prepayment). | Credit |
| Release fact | MBS nominal spread vs OAS can diverge by 50–100bp depending on prepayment expectations. In 2022, rising rates extended MBS duration, widening OAS even as nominal spreads narrowed. | Published example |
Countercase, invalidators, and sources
The relationship is conditional: another driver can dominate the same asset over the selected horizon.
- · The underlying observation changes materially.
- · The selected asset has no measurable exposure to this mechanism.
Why it matters
Comparing nominal spreads across callable and non-callable bonds is misleading; OAS is the only apples-to-apples credit signal.
Worked example
MBS nominal spread vs OAS can diverge by 50–100bp depending on prepayment expectations. In 2022, rising rates extended MBS duration, widening OAS even as nominal spreads narrowed.