The yield spread, and the current yield spread trend. Is this trend a positive for the current stock market?
The yield spread is the difference between yields on differing debt instruments of varying maturities. This yield spread, or difference in yield, is a measure of the risk premium for investing in higher-risk bonds (BAA) compared to low-risk bonds (AAA). (Investment Analysis and Portfolio Management, 10th Edition) This difference is most often expressed in basis points (BPS) or percentage points, this are commonly quoted in terms of one yield versus that of the U.S. Treasuries, where it is called the credit spread.
As an example, if a 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%. If the 30-year bond is trading at 6%, then based on the historical yield spread, the five-year bond should be trading at around 1%, making it very attractive at its current yield of 5%. (Investopedia.com)
The yield spread is straightforward to calculate since it is a subtraction of the yield of one from the other in terms of percentage or basis points. If the yield spreads expand or contract this signals changes in the underlying economy or financial markets. This is used by the investors when gauging the level of expenses for a bond or group of bonds. Usually, the higher the risk on a bond or asset class carries the higher the yield spread will be and when an investment is viewed as low-risk, investors do not require a large yield for investing their money.
Many financial experts agree that the 60:40 asset allocation model is outdated. With the equity forecast at historic lows, top portfolios managers are turning to alternative assets like fine arts to enhance returns. Fine art is a $1.7 trillion asset class that’s outpaced the S&P 500 by more than two times in the last 25 years. (Investopedia.com)
Reference:
Investment Analysis and Portfolio Management, 10th Edition, By: Reilly
Yield Spread: Definition, How It Works, and Types of Spreads (investopedia.com)
