DEFINITION of Atlantic Spread
Atlantic spread is the difference in yield, expressed in basis points, between the U.S. 10-year Treasury Note and the German 10-year Bund. These two debt securities are the safest and most liquid in the respective economies and serve as benchmarks for other fixed income securities. The U.S. 10-year note and the German 10-year Bund are also closely followed for indications on the health of the economies, monetary policies and overall investor sentiment with regard to risk. The yield of the German Bund is also considered somewhat representative of the state of the European Union (EU) economy in general.
BREAKING DOWN Atlantic Spread
Spread is the yield difference between two debt securities. If debt security A yields 5% and debt security B yields 4.5%, the spread is 50 basis points (1% = 100 basis points). A number of factors can account for a positive spread of one debt instrument relative to another including creditworthiness, supply and demand, trading liquidity, and the structures of the securities. For government debt across borders - or in the case of Atlantic spread, across an ocean - a host of other factors are at work, namely key economic variables such as gross domestic product (GDP) growth rates, inflation rates, unemployment rates, exchange rates, and fiscal and monetary policies. Levels of risk taking or risk aversion also contribute to the amount of spread between two government benchmark notes.
The Atlantic spread between the U.S. and German 10-year notes is a result of the complex interplay between the aforementioned influences. When the spread of the U.S. Treasury is +150 basis points versus the German Bund, for example, it may signify that inflation is rising at a faster rate than in the EU, or that economic growth rate is accelerating at a faster pace than in the EU, or that the European Central Bank (ECB) is not inclined to raise interest rates as quickly as the Federal Reserve Board in the U.S. The movement of the spread is important for traders and investors of fixed income products whose values are tied to the benchmark notes.