Yield Spread

Loading the player...

What is a 'Yield Spread'

A yield spread is the difference between yields on differing debt instruments, calculated by deducting the yield of one instrument from another. The higher the yield spread, the greater the difference between the yields offered by each instrument. The spread can be measured between debt instruments of differing maturities, credit ratings and risk.

BREAKING DOWN 'Yield Spread'

Looking at the yield spread, often with historical spreads, can give investors ideas for potential investment opportunities.

For example, if the five-year Treasury bond is at 5% and the 30-year Treasury bond is at 6%, the yield spread between the two debt instruments is 1% (6% - 5%). If the yield spread has historically been closer to 5%, the investor is much more likely to invest in the five-year bond compared to the 30-year bond (as it should be trading around 1% instead of 5%).

In other words, if the 30-year bond is trading at 6%, then based on the historical yield spread, the five-year should be trading at around 1%, making it very attractive at its current yield of 5%.

RELATED TERMS
  1. Inverted Spread

    A situation in which the yield difference between a longer term ...
  2. Choice Market

    A market in which the spread between the bid and the ask for ...
  3. Intramarket Sector Spread

    The yield spread between two fixed-income securities with the ...
  4. Yield Curve Risk

    The risk of experiencing an adverse shift in market interest ...
  5. Intermarket Spread Swap

    A swap transaction meant to capitalize on a yield discrepancy ...
  6. Intermarket Sector Spread

    The difference in yields between two fixed-income securities ...
Related Articles
  1. Term

    Understanding Yield Spread

    Yield spread is the difference in yields between debt instruments.
  2. Professionals

    Types of Yield Measures

    CFA Level 1 - Types of Yield Measures. Learn the different methods of calculating yield spreads and the formulas behind them. Discusses the benefits of using relative yield spreads.
  3. Professionals

    Spreading

    Spreading
  4. Bonds & Fixed Income

    Corporate Bonds: An Introduction To Credit Risk

    Corporate bonds offer higher yields, but it's important to evaluate the extra risk involved before you buy.
  5. Investing Basics

    What is Spread?

    Spread has several slightly different meanings depending on the context. Generally, spread refers to the difference between two comparable measures.
  6. Bonds & Fixed Income

    How Bond Market Pricing Works

    Yield is the commonest measure used to determine a bond’s expected return. Yield-to-maturity and spot rates are the two primary yield measures.
  7. Professionals

    Intermarket vs. Intramarket Sector Spreads

    CFA Level 1 - Intermarket vs. Intramarket Sector Spreads. Learn the various sectors that make up the bond market and how they relate to yield spreads. Also relates credit spreads to economic ...
  8. Investing Basics

    Explaining Credit Spread

    A credit spread has two different meanings, one referring to bonds, the other to options.
  9. Bonds & Fixed Income

    How Bond Market Pricing Works

    Learn the basic rules that govern how bond prices are determined.
  10. Professionals

    Options and their Benefits

    CFA Level 1 - Options and their Benefits. Learn how some options can benefit the holder of a bond, while others benefit the issuer. Relates the degree of liquidity to yield spreads.
RELATED FAQS
  1. Below is an example of US Treasury yields for various maturities ...

    The correct answer is b. A normal yield curve chart shows long-term debt instruments having higher yields than short-term ... Read Answer >>
  2. What are the most popular and useful measures of credit spread?

    Learn about the different types of credit spread measures that measure risk, including the zero-volatility spread and the ... Read Answer >>
  3. What is the difference between the yield of stock and the yield of a bond?

    Explore and understand the various meanings of the investment term "yield" as it is applied to equity investments and bond ... Read Answer >>
  4. Can I use the current yield to compare a bond to an equity investment?

    Learn about the different types of yield measurements for stocks and bonds, and find out how to make careful comparisons ... Read Answer >>
  5. What are the different formations of yield curves?

    Find out more about the yield curve and yield curve formations, what yield curves measure and the three main types of yield ... Read Answer >>
  6. What is the difference between yield and rate of return?

    Read about the differences between yield and rate of return. See why many novice investors often struggle more with the concept ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center