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Spread bonds or bond spreads reveal the relative risks of various bonds. An investor takes higher risks when the spread is high. When referring to bond spreads, people usually compare the yields of US Treasury bonds or government bonds. Treasury bonds are considered to be more creditworthy than bonds issued by municipalities, provinces or corporations. One can compare bond spreads between bonds of different interest rate coupons and different maturity periods.[br]
Spread Bonds – Types of Bond Spreads
Although the concept of spreads seems simple, they mirror a lot of valuation factors.
Spread Bonds – Intermarket Sector Spread: When the spread between yields from two sectors of the bond market with the same maturity is compared, it is intermarket sector spread.
Intramarket Sector Spread: When the spread is between two bonds of the same maturity within the sector, it is called intramarket sector spread. For example, one can compare the interest rates offered by five-year utility corporate bonds and five-year industrial corporate bonds.
Spread Bonds- Quality Spread: You can compare the spread between non-treasury securities and treasury securities, which are identical in all aspects except the quality rating. For example, one can compare the interest rates of Single A-rated industrial bonds and Treasury Bills.
Spread Bonds – High Yield Bond Spread: Market analysts and investors use high yield spreads to gauge the overall credit markets. Higher spreads reflect higher default risk in junk bonds. It reflects the overall corporate economy and credit quality and broad weakness in macroeconomic conditions.[br]
Coupon Spreads: These spreads project the difference between bonds that have different interest rate coupons.
Liquidity Spreads: These spreads reflect the difference in ease of trading or liquidity between bonds.
Swap Spreads: These spreads show the demand for fixed to floating interest rate swaps.
Yankee Spreads: These are spreads between US dollar bonds of foreign and domestic issuers.
Besides the above, there are other types of spreads as well. Market analysts and investment strategists use spreads between the earnings yields and dividend yields on bond yields and stocks to judge the relative attractiveness of these markets. Basically, these spreads help you to predict future interest rates and judge the current market conditions.