Yield spread

<h2 id="yield-spread-analysis">Yield spread analysis</h2>
<p class="note">Further information: <a href="/facts/Fixed_income_analysis/aRDR7NwL">Fixed income analysis § Analysis</a>, and <a href="/facts/Corporate_bond/jpuMW4rQ">Corporate bond § Risk analysis</a></p>
<p>Yield spread analysis involves comparing the yield, maturity, liquidity and creditworthiness of two instruments, or of one security relative to a benchmark, and tracking how particular patterns vary over time.
</p><p>When yield spreads widen between bond categories with different credit ratings, all else equal, it implies that the market is factoring more risk of default on the lower-grade bonds.  For example, if a risk-free 10-year Treasury note is currently yielding 5% while junk bonds with the same duration are averaging 7%, then the spread between Treasuries and junk bonds is 2%.  If that spread widens to 4% (increasing the junk bond yield to 9%), then the market is forecasting a greater risk of default, probably because of weaker economic prospects for the borrowers.  A narrowing of yield spreads (between bonds of different risk ratings) implies that the market is factoring in less risk, probably due to an improving economic outlook.
</p><p>The <a href="/facts/TED_spread/FJWTSM8w">TED spread</a> is one commonly-quoted credit spread.  The difference between Baa-rated ten-year corporate bonds and ten-year Treasuries is another commonly-quoted credit spread.<a class="footnote-ref" id="fnref:2" href="#fn:2"><sup>2</sup></a>
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<h2 id="consumer-loans">Consumer loans</h2>
<p>Yield spread can also be an indicator of profitability for a lender providing a loan to an individual borrower. For consumer loans, particularly home <a href="/facts/Mortgage_loan/EtGHG9q3">mortgages</a>, an important yield spread is the difference between the interest rate actually paid by the borrower on a particular loan and the (lower) interest rate that the borrower's credit would allow that borrower to pay.  For example, if a borrower's credit is good enough to qualify for a loan at 5% interest rate but accepts a loan at 6%, then the extra 1% yield spread (with the same credit risk) translates into additional profit for the lender.  As a business strategy, lenders typically offer <a href="/facts/Yield_spread_premium/W8tue0Ys">yield spread premiums</a> to brokers who identify borrowers willing to pay higher yield spreads.
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<h2 id="see-also">See also</h2>
<ul><li><a href="/facts/I-spread/RTWJhCBE">I-spread</a></li>
<li><a href="/facts/Option-adjusted_spread/8owWgTI4">Option-adjusted spread</a></li>
<li><a href="/facts/Spread_trade/4v9BR5AR">Spread trade</a></li>
<li><a href="/facts/Yield_curve/n0Q8Ktk0">Yield curve</a></li>
<li><a href="/facts/Yield_spread_premium/W8tue0Ys">Yield spread premium</a></li>
<li><a href="/facts/Z-spread/IStutLHl">Z-spread</a></li></ul>
<h2 id="notes">Notes</h2>

<h2 id="references">References</h2>

<ol>
<li id="fn:1"><p>Credit Spread Curve, fincyclopedia.net <a href="https://fincyclopedia.net/derivatives/c/credit-spread-curve" target="_blank">https://fincyclopedia.net/derivatives/c/credit-spread-curve</a> <a href="#fnref:1" class="footnote-back-ref">↩</a></p></li>
<li id="fn:2"><p>Macro Musings Blog. 26 November 2008. What Corporate Bond Yield Spreads Tell Us <a href="http://macromarketmusings.blogspot.com/2008/11/what-corporate-bond-yield-spreads-tell.html" target="_blank">http://macromarketmusings.blogspot.com/2008/11/what-corporate-bond-yield-spreads-tell.html</a> <a href="#fnref:2" class="footnote-back-ref">↩</a></p></li>
</ol>

Yield spread open-in-new

Yield spread