Back to Basics: Spread

Back to Basics: Spread

In finance, a spread is the difference between two related prices, interest rates, or yields. It’s a simple concept that shows the gap between what one party pays and what another receives.

One common example is the bid-ask spread in stock trading. The bid is the highest price a buyer is willing to pay, while the ask is the lowest price a seller will accept. The difference between them is the spread. A narrow spread usually means there’s high trading activity (liquidity), while a wider spread could mean fewer trades or more risk.

Another example is the yield spread between government and corporate bonds. If a corporate bond offers a higher yield than a Treasury bond, that extra yield—the spread—compensates investors for taking on more risk.

Spreads are also used to understand credit risk and funding conditions. One well-known measure used to be the LIBOR-OIS spread, which tracked bank credit risk. However, LIBOR has been phased out. Today, markets use SOFR (Secured Overnight Financing Rate) instead.

  • SOFR-OIS Spread: Reflects market expectations of Federal Reserve policy and overnight funding health.
  • SOFR-Treasury Spread: Shows credit and liquidity risk in the market.
  • SOFR–Repo Spread: Measures the premium for borrowing cash using Treasuries as collateral.
  • SOFR Basis Swaps: Help compare different types of SOFR or SOFR with other rates.
  • Credit Spread Adjustments (CSAs): Adjust SOFR-based loan rates to reflect borrower credit risk.

Why it matters: Spreads give important clues about market sentiment, risk levels, and liquidity. Whether you’re trading stocks, analyzing bonds, or studying interest rates, understanding spreads can help you make smarter financial decisions.

Visit GLOBAL ABAS for more insights.

Disclaimer: This post is for informational purposes only and does not constitute financial, legal, or investment advice. Please consult a qualified professional for guidance tailored to your situation.

For personalized support, contact GLOBAL ABAS Consulting, LLC with your specific questions or concerns.

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