I know there are a million threads on OAS and I get that it’s the Option Removed spread and the spread you are getting paid for taking the additional risk over the benchmark treasury. There’s a piece in the application that I’m missing and could use some clarity on.

I’m looking at a 5yr agency that’s callable in a year and quarterly after that. The coupon is 2.75 and 40 over the tsy but the OAS on the callable is -21. Clearly, you are getting a 40 spread to the 2.34, but why would the OAS be negative? What is happening in the background to say that you are essentially giving up something, despite the higher yield, in owning the callable of the treasury?

Something is just not clicking for me. Any help would be appreciated.