Hi guys, why does the bond yield spread gets narrower when demand is high and wider when supply is low?
Can’t seem to get the reasoning behind this.
If im comparing a 10 yr treasury gov bond vs a BBB bond yield, if my demand is high , my price will increase , making my yields low. But at the same time, wouldnt my treasury gov bond decrease by the same quantum? Why does my yield spread gets narrower then?
Your yield ( corporate issues) is a simple sum of T- sec, and host spreads including default, liquidity, option etc.
Demand going up leads to price increase which in turn leads to yield narrowing. Reverse is the case when Demand is low
does that mean my T-bond yields are constant?
With relative to the corporate issue -Yes.
The spread (eaxtra yield) required for liquidity risk declines as increased demand implies more volume will be traded. If you but now there is a higher chnage you will be able to sell later.