Spreads

By THIS IS MONEY
Updated:

 

The Daily Mail City team explains what market spreads are and why they're a good way of comparing the risk associated with investing in one security with another.

Marmite?

Not for me thanks, can't stand the stuff. And in any case, this is nothing to do with lubricating your slice of toast.

Spreads are a financial market term that describes the distance between yields of two different securities.

Beg pardon?

Sorry, not easy this one. Yields are the implied return from a given investment, such as a government bond.

The spread is the difference between two yields. They are a good way of comparing the risk associated with investing in one security with another.

A massive disparity in spreads suggests the bond with higher yield is seen as significantly more risky - ie the borrower that issued it is more likely to default.

Examples please.

One of the most closely followed spreads at the moment is between Greek and German government bonds.

Berlin is seen as one of the most impeccably reliable borrowers on the planet, so the yields on its bunds are extremely low. Athens, needless to say, is a very different kettle of feta.

The spread on ten-year German and Greek bonds has exploded in recent weeks to more than 8%, peaking at 10% at one point.

This has coincided with investor worries that Greece may fail to secure a bailout from the EU and the IMF, which could trigger a partial default or restructuring of its debt.

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