Factors that affect the yield spreads

Impact of embedded options
Call option increases reinvestment risk and yield spread must be higher to compensate.
Option adjusted spread < nominal spread

Put option is favorable towards investors and thus reduces yield spread
Option adjusted spread > nominal spread

The yield spread of Agency MBS is primarily due to prepayment risk. Option-adjusted spread excludes the risk due to the embedded option, while the nominal spread does not, making an option-adjusted spread a superior measure to compare returns.

Impact of Liquidity
Lack of liquidity can increase yield spread, even of off-the-run Treasuries.

Impact of tax-exemption:
Munis trade at low yields (even negative yield spread) because their income is tax exempt.
After-tax yield = Pre-tax yield x (1 - Marginal tax rate of investor)

Impact of technical factors:
Imbalance between supply and demand for securities drives temporarily distorted. Yield spreads rise if there is a glut in supply of bonds. The yields spreads of sovereign bonds over US Treasuries are “nominal” since the currencies may be different and the spreads are simply differences in two yields.