YIELD SPREAD
Back to GlossaryDefinition
The difference between two yields, often used to compare bonds of different maturities or credit risks.
Summary
A yield spread is the gap between the interest rates (yields) of two different bonds or securities, typically expressed in basis points (hundredths of a percent). It's like comparing the 'extra reward' investors demand for taking on additional risk or lending for different time periods. For example, if a 10-year government bond yields 3% and a 2-year government bond yields 2%, the yield spread is 1% or 100 basis points. Investors use yield spreads to assess relative value, risk, and market conditions.
Usage Context
Essential when analyzing bond investments, understanding market risk assessment, evaluating credit quality differences, studying yield curve relationships, and making fixed-income portfolio decisions.
Common Confusions
- Thinking yield spread is the same as interest rate
- Confusing which bond's yield to subtract from which
- Not understanding that spreads can be negative
- Assuming wider spreads always mean higher returns
- Mixing up credit spreads with maturity spreads
