Reduced Spread

  

Categories: Credit, Bonds

Spread is the yellow zone in which buyers and sellers of securities make their daily bread.

In the pits of the NASDAQ, MSFT is offered for $57.31 to buy, and if you're looking to sell MSFT, you'll only get $57.25. There's a 6-cent spread there. Bonds are bought and sold in similar fashion. So when a spread is reduced, it means that instead of there being, say, 6 cents, there's only 3.5 or whatever for the MSFT-inventory-stockers to live on.

What causes a low spread? Eh. Low volatility. Huge volume. Tons of competitors all selling the exact same commodity (a share of MSFT). So that's reduce spread in a stock trade.

The term also applies to bonds, where most taxable bonds are priced as a "spread to treasuries," i.e. U.S. Treasury Bonds. So if a UST is coming due in 5 years and pays 2.7%, then a corporate bond will cost...more. Almost undoubtedly. (A few one-off tiny diversions from that pattern exist in history anomalously, like in the head of the 2008 mortgage crisis, but that's about it.)

So if a really solid credit company like Apple wants to borrow similar 5-year paper, they might pay 2.85% for the privilege...and you'd say that their Spread to Treasuries is 15 basis points. You don't have to state that they're trading higher than Treasuries. That's a "duh."

Nothing's safer, even still today, than Uncle Sam's signature.

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