Yield Spread
Yield spread shows the difference between returns on two different investment instruments.
Yield spread calculation is very simple, yet very useful. You can see the yield spread by deducting the yield of one instrument from another and compare these two financial products. The higher the yield spread the greater the difference in return two products will offer.
Investors use yield spread in order to spot great investment opportunities, often by comparing it with historical values.
If, for example, yield on five-years Treasury bonds is 4% and on thirty-year treasury bonds is 6%, yield spread is 2%. However, when we take into consideration historical values of the same bonds, when yield on five-years Treasury bonds was 2% and on thirty-year Treasury bonds was the same, 6%, we get the yield spread at 4%. This difference in historical values tells us that short-term Treasury bonds are far more attractive today than they were few years ago.
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