Hi can someone assist me with this. I cannot remember the relationship between yield spreads and economic growth. Is it higher yield spreads indicate future economic growth due to an increase of supply in bonds? Thank You
Think about what happened last year when the economy was plummeting: yield spreads widened to historic levels. Increased yield spreads indicate greater economic uncertainy. Investors that require higher risk premiums (yield spreads), are requiring additional compensation for bearing additional risk. An abundance of additional risk does not indicate a healthy economy.
KickinTheBricks Wrote: ------------------------------------------------------- > Think about what happened last year when the > economy was plummeting: yield spreads widened to > historic levels. > > Increased yield spreads indicate greater economic > uncertainy. Investors that require higher risk > premiums (yield spreads), are requiring additional > compensation for bearing additional risk. > > An abundance of additional risk does not indicate > a healthy economy. His motion is second’d.
I just think of it from a supply/demand perspective. In a bear market, people flock from risky assets (ie corporate bonds) to less risky assets (treasuries). The increased demand for treasuries, pushes down the yields on the treasuries. The selloff of risky assets increases their yields. Thus, the spread widens. In bull markets the opposite is true.