Zero coupon 10 year govt bond - no reinvestment risk

CFA Level III
#1

Anyone knows what is the approx credit spread (in basis point) of a US 10 year govt bond vs US 10 year zero coupon govt bond (i.e. no reinvestment risk)? Thanks in advance.

#2

20 bps but i forget where i got that. Maybe CDS on treasuries? I forget.

#3

thanks jbaldyga.

#4

what would there be a credit spread between two government bonds?

#5

my understanding is it’s not really a spread but the portion of the base rate that compensates for default risk. there’s a way to back into it, but my memory is very hazy on the method. I just vaguely remember seeing that about 20 bps is the compensation for default risk on U.S. longer term treasuries. I’ll dig around to see where i got it.

#6

agree with bills…how can there be any default premium between 2 same tenor UST? 20bps versus what?

#7

20 bps vs what it would yield if there was truely zero chance of a default.

#8

Pmoonoi, Based on my understanding of your question, there is a yield differential on a zero coupon Treasury (also called a STRIP) and a regular Treasury, but it does not come from a credit “spread”. From a credit perspective, the STRIP and regular Treasurys of the same tenor are of the same credit risk, so the yield differential does not consitute a credit spread. The 10-year TSY yield closed at 3.42 today, whereas the equivalent 10-year STRIP yield will be higher due to the fact that the STRIP is priced at a discount to the regular TSY. The yield differential is approx. 7-30bps depending on the type of STRIP used in the 10-year part of the curve (coupon or residual) because resids are more liquid than coupons for example and as such resid STRIPS would have a lower yield and a smaller yield differential with regular Treasuries of the same duration than coupon STRIPS. So to recap, the yield differential (for a given tenor) is not due to a credit spread. It is due to a combination of factors such as liquidy and issue size that are specific to each particular STRIP issue.

#9

Please watch the tennis - it really is far more exciting.

#10

Late night at work - but luckily I have the final up on one of my screens…