The I-spread is based on which type of spreads?

The I-spread, or interpolated spread, is specifically related to swap spreads. It measures the difference in yield between a bond and a standard benchmark swap rate, typically focusing on interest rate swaps. The I-spread is calculated by taking the yield spread of a bond over a benchmark interest rate curve, usually represented by the swap curve, which provides a more precise measure of credit risk and liquidity risk for fixed-income securities.

Using the swap curve as a benchmark allows investors to isolate the risks that are specific to the bond itself, such as credit risk, while minimizing the influence of broader interest rate movements. This makes the I-spread particularly valuable in the analysis of interest rate-sensitive instruments where swaps serve as a relevant comparison point.

Understanding why the I-spread is based on swap spreads is crucial for assessing a bond's relative value and for making informed investment decisions in the fixed-income market. The clarity provided by using swaps helps in analyzing how changes in macroeconomic factors might affect the bond’s yield in relation to its credit quality.