I was looking at the z-spread term structure for past 50 years on Bloomberg. For investment grade bonds, rated A or higher, the z-spread increases as the time to maturity increases (as expected). However, for lower grade bonds (B or lower), the z-spread actually decreases with increasing time to maturity. Why does this happen? With time to maturity increasing, the z-spread (premium on top of risk free rate) should always increase, isn't it? Could you please clarify? thanks, Sam
I think you got an answer to your question on another forum... There's a relatively simple, intuitive reason for this.
Increased spec. grade tenor means a person is marrying, as opposed to dating, a piece of garbage. A less-than-credit-worthy firm is more likely to default over a 10 year timeframe than a 1 year timeframe.