Kind of confuse on spreads and interest rates. I know decrease spreads happen when the market is doing well, but does this translate to a decrease in yields?
what is spread ?
Spread = Yield on Bond - Yield on Treasury Security with same maturity.
Spread decreases means “Yield on Bond” reduces against Treasury Security. This means Price increases.(Market is doing well).
No, yields are not low when the market is doing well. They are generally low when the market is very poor. See: the last 4 years. There is excess money, so borrowing is very cheap. When the market does well, there is a shortage of money, so rates increase.
aaron there is a particular reason that statement above is written and it is specific to the Level III Curriculum.
Yields redcue for the credit bonds when market is doing well, so the yield reduces and the spread reduces when compared to other times.
Yes, spreads on risky bonds decrease in good times because the yield decreases. I was referring to Treasury yields being high/low as a baseline. That is, a good market will have low spreads, and thus low yields all else equal, but yields in general are higher in good markets (which is exactly why the spread matters, since Treasury movements result in credit yield movements). Sorry for the confusion.