How is the I-spread typically used in bond analysis?

The I-spread, or interpolated spread, is primarily utilized in bond analysis to assess the yield of a bond in relation to benchmark swap rates. Specifically, it measures the yield spread between a bond's yield and the yields of interest rate swaps that have similar maturities. By focusing on this comparison, analysts can gain insight into the risk premium associated with the bond, accounting for credit risk, liquidity, and other factors that may not be reflected in government bonds or other benchmark securities.

Using the I-spread is particularly helpful because it provides a standardized metric for assessing relative value. It allows investors to evaluate how much additional yield they can expect from a bond relative to swap rates, which are often viewed as a baseline for risk-free returns in a given maturity range. This can be especially useful when comparing different bonds or assessing whether a bond is fairly priced in the market.

Understanding the I-spread in this context is crucial for bond traders and portfolio managers, as it informs their decision-making regarding bond investments, risk management, and yield expectations.