Spreads used for fixed-rate mortgages:
I: Conventional yield spread to Interpolated Yield Curve
J: Conventional yield spread to Interpolated Nominal Yield Curve
A: Conventional yield spread to nominal (Actual) Treasury benchmarks
U: Conventional yield spread to specific (Unique) benchmark
Z: Cashflow spread to implied spot curve
S: Cashflow spread to actual US STRIP Curve
D: Conventional yield spread to Duration-matched US STRIP benchmark
N: Conventional yield spread to swap curve
E: Cashflow spread to Eurodollar spot curve (IMM)
The primary distinction of these methods is whether spread is with respect to yield or cashflow. A yield spread compares on yield to another, with both computed in a conventional manner. However, a cashflow spread discounts each component cashflow at its own spot rate. The most popular spread choices are:
US Treasury, Coupon curve Yield Spread: I
US Treasury, Spot rates Cashflow Spread: Z
US Swaps, Coupon curve Yield Spread: N
US Swaps, Spot rates Cashflow Spread: E
(Most) Spread-Type Features:
A-spread: Conventional yield spread to a specific on-the-run Treasury benchmark, such as 5-year or 10-year. Any benchmark can be specified, including a hypothetical maturity - in which case the associated yield is interpolated based upon nominal benchmark maturities.
J-spread: A variation of A-spread wherein a hypothetical (interpolated) maturity point is automatically set to the mortgage's WAL.
I-spread: Similar to J-spread, except that it anchors off the literal maturity of the benchmarks - rather than their nominal values.
U-spread: Permits spreading to an arbitrary bond, including "off-the-runs".
D-spread: Recognizes the analytical superiority of duration to simple WAL, which ignores coupons and present value considerations. D-spread compares the conventional yield of the mortgage to that of a comparable Treausury STRIP, where the STRIP has the same Macauley duration (i.e. maturity) as the Macauley duration calculated mortgage. Also known as a "poor man's Z-spread."
Z-spread: The first measure to consider the shape of the yield curve. Each component of the mortgage cashflow is discounted at its own spot rate plus the Z-spread, with the spot curve having been generated by stripping the on-the-run benchmark bonds.
S-spread: Exactly the same as the Z-spread, except that the spot curve is determined by using the actual STRIP bonds with their market prices. While theoretically superior to Z-spread, problematic pricing for the less-liquid STRIP bonds is a mitigating factor.
N-spread: Analogous to I-spread, except that the reference curve is the US dollar Swap Rate curve "I52".
E-spread: Analogous to Z-spread, except that the reference curve in that it is a cashflow spread, not a conventional yield spread. The reference curve is the spot Eurodollar rates as determined by future contracts. Caluctaed on a semi-annual 30/360 daycount basis with paydates adjusted to actual business days where applicable. (All other spreads are 30/360 basis with nominal paydates.)
OAS: An averaging statistic for multiple cashflows, whereas the above spread modes correspond to a single cashflow.