Credit

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.

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.

Frequently asked

How is OAS calculated?⌄

By running an interest-rate model (typically a tree) and finding the constant spread that prices the bond at market.

Is OAS always positive?⌄

For most credit yes; for AAA MBS it can be near zero or negative when prepayment optionality is hostile to the holder.

Why does it matter for MBS?⌄

MBS holders are short the prepayment option; OAS strips that out to reveal the underlying credit/liquidity premium.

Is OAS used for IG indices?⌄

Yes — Bloomberg US Corporate OAS is the standard IG spread benchmark.

Related terms

Credit Spread

Credit

IG vs HY Spreads

Credit

Default Cycle

Credit

Term Premium

Rates

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