Spread

A spread is simply a gap, or difference; so the ‘spread’ between two and five is three. The bonds markets use them to express the difference between the yield on a very safe security like a government bond (‘Treasury’ in the US, ‘Gilt’ in the UK) and a riskier one issued by a government operating in an emerging market.

Say a ten-year US Treasury bond offers a yield of 4.15% and an equivalent emerging-market government bond offers a yield of 6.95% reflecting the higher risk both of its bonds falling in price and/or that government defaulting. The spread is 2.8% (6.95 – 4.15). This can also be expressed as 280 ‘basis points’, since a single basis point is 1/100th of one percent. The bigger the spread, the riskier the emerging market bond is thought to be.

Lastly, spreads are said to ‘widen’ as risk, and the gap between bond yields, increases, and ‘narrow’ when risk reduces.

MoneyWeek magazine

Latest issue:

Magazine cover
Don't panic!

The Greek vote is a great opportunity to buy Europe

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Paul Hodges: house prices could fall 50% in 'Great Unwinding'

Merryn Somerset Webb interviews Paul Hodges about deflation, the global economy's 'Great Unwinding', and how Britain's house prices could halve.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


30 January 1933: Adolf Hitler takes power

Adolf Hitler came to power on this day in 1933 following a political gamble that went disastrously wrong, and allowed the Nazi leader to call fresh elections.