V.17:6 (281-283): Yield Spread Tunnels by Lorne W. Rae

Yield Spread Tunnels Fixed income investors have an array of instruments in which to invest. They can choose from an assortment of maturities as well as credit quality. Here’s a simple technique with which to identify opportunities in the fixed-income market.

One common technique for assisting fixed-income investors and traders in their decision making is the analysis of yield spreads. A yield spread is the difference in yield to maturity (or that discount rate which equates the present value of a bond to its market value) between two bonds. The spread is expressed in terms of basis points (each 1 /100 of 1%), and yield spreads occur because bonds vary in maturity, in coupon, in marketability, and in quality.