High-Yield Bond Spread
What it is:
A high-yield bond spread is simply the difference in debt securities or, more commonly, two classes of high-yield debt securities.between two high-yield
How it works (Example):
Why it Matters:
High-yield bond spreads help investors identify opportunities. The goal is to take advantage of expected changes in yield spreads between certain sectors of the . The concept applies to the entire . To illustrate, consider the following table, which compares yields of various sectors to U.S. Treasuries.
There could be several reasons for the difference in yields among these sectors. During economic slowdowns, for instance, yield spreads often widen between risk-free securities and the securities of other issuers because non-Treasury issuers must work harder to generate debts, making their default risk a bit higher. The opposite is true during periods of economic expansion. The task is to determine how prices and yields on securities in a specific sector move together.to service their
Ultimately, when an investor using this strategy believes the high-yield bonds is out of line, he or she either buys or sells securities in those sectors (depending on whether the spread is too narrow or too wide) as a way to earn extra returns when the sectors eventually realign. In the example above, income investors might notice that the spreads on high-yield bonds and from the health care industry are especially high (a 375-point spread for high versus the usual 500-point spread and the 250-point spread for health care versus the usual 400-point spread) and might take advantage of these narrow spreads by buying in sectors where spreads are expected to widen.between two