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.

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