Spread

TOP CONTRIBUTORS

Varun Divgikar

This page is about the Bid/Ask spread. For spread options positions, see the article on Options - Spread

Spread refers to the difference between two positions or prices. Generally, spread refers to the difference between the ask and the bid price of a security. The higher the yield spread, the greater the difference between the yields offered by each instrument. The spread can be measured between debt instruments of differing maturities, credit ratings and risk.

However, spread can also be used to refer to other comparable differences. A credit spread refers to difference in yield between two bonds of different quality or maturity. An options spread refers to the difference between the strike price of the option, and the market price of the underlying security.

Looking at the yield spread, often with historical spreads, can give investors ideas for potential investment opportunities.

For example, if the five-year Treasury bond is at 5% and the 30-year Treasury bond is at 6%, the yield spread between the two debt instruments is 1% (6% - 5%). If the yield spread has historically been closer to 5%, the investor is much more likely to invest in the five-year bond compared to the 30-year bond (as it should be trading around 1% instead of 6%).

In other words, if the 30-year bond is trading at 6%, then based on the historical yield spread, the five-year should be trading at around 1%, making it very attractive at its current yield of 5%.