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Yield Spread

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The term yield spread is the name given to the difference between two different yields, or rates. What yields depends upon the context in which the term yield spread is used. In talking about the yield curve, a bond market analyst may be a comment on the yield spread between the two and ten year treasuries. A mortgage broker is often compensated by the difference between the wholesale rate on the loan and the rate paid by the borrower, called the yield spread premium. The financial significance of a given yield spread is relative to the norm for that pair of yields. The larger the difference in yield spread from the norm, the greater the profit or loss for an entity sensitive to variation in that yield spread. A yield spread can also shrink to zero then begin to expand in the opposite direction, as happens in the case of a negative yield curve.



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