How should I interpret information about bond spreads that narrowed or widened the most? I see this information in the financial pages in the newspaper, and have some ideas about what it means, but have yet to find any definitive answers.
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do you mean the bid/offer spread or the yield curve spread (aka convexity)?– MD-TechJul 11, 2018 at 14:42
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I mean the bid/offer spread. For example, in the WSJ in the financial section there are tables that list "Bond Issues with spreads that are tightening the most", "Bond Issues with spreads that are widening the most:". I have taken it to mean (esp when widening) changes to the trading volumes. For example, we've tried to buy a certain bond that has a low volume (we had to have the broker trade in several chunks to get the amount requested). That bond seemed to have uncertainty in what the eventual accepted price would be....so I am thinking larger spread= more uncertain about the price– Cheryl666Jul 15, 2018 at 19:36
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2 Answers
There are several usages of the phrase bond spread.
In the simplest sense, a bond's spread is the bid/ask spread of a single bond.
More commonly, bond spread refers to the interest rate differential between two bonds which allows one to compare the value of one bond to another. The higher the spread, the higher the risk of one of the issues.
A common usage of bond spread is the comparison of the yield of a particular government bill or bond versus bonds issued by corporations or municipalities. Even the spread between different countries is available. This data is provided on a daily basis and is also available historically.
For example, from the WSJ, here's a comparison of global bonds:
Yields and spreads over or under U.S. Treasurys on benchmark two, five and 10-year government bonds in selected other countries; arrows indicate whether the yield rose or fell in the latest session: (see link for data)
Bond spreads are also used as economic indicators. Widening spreads indicate a slowing economy and vice versa.
answered Dec 1, 2020 at 14:34
Bond spreads can mean many different things and is contextual. I will give you a non-exhaustive list of some of the things it can mean within some context, and the most common usage I have come across as a fixed income trader at an investment bank. Note that a comment mentioned yield curve spread, but I have never heard a yield curve referred to as narrowing or tightening or widening, curve spreads tend to steepen or flatten (or get more or less inverted), so I will ignore this. Also The comment about bid/offer spread is valid but probably needs little explanation. Otherwise..
Government bonds: typically there are two spreads of note, versus swaps, also called an asset swap spread or relative to some more noteworthy benchmark, e.g. Italian bonds spread over German bonds, for example, called an inter-country spread. But again widening or narrowing is contextual.. Italian bonds widening versus Germany means they become cheaper, whereas an asset swap widening means the bonds get more expensive relative to swaps.
Credit Bonds: typically the spread is the credit spread and it is effectively an asset swap versus swaps. Credit bonds usually have higher yields than swaps and so widening means that the bond gets cheaper relative to swaps.
Inflation Bonds: There is a term called the breakeven spread which refers to the yield on nominal bonds minus the yield on equivalent maturity inflation bonds. It is generically the expected level of inflation until that maturity, called breakeven since if that is in fact the realised level of inflation the two bonds will have been worth the same, held to maturity. Widening corresponds to increased levels of expected of inflation.
In the general case, if I wasn't sure, I would guess that "widening" corresponded to a cheapening in that specific bond, whereas "tightening" more likely than not means getting more expensive relative to whatever it is being spread against.
