Yield spread

One yield subtracted from another, expressed in basis points. Three families cover most of the uses. A credit spread compares a corporate security with a government security of similar maturity in the same currency, and prices the risk that the company does not pay. A sovereign spread compares one government's securities with a benchmark government's, and prices country risk. A maturity or curve spread compares two points on a single issuer's curve, and prices the slope.

Subtraction is the whole point of the measure. Two securities of similar maturity share the general level of interest rates, so differencing them removes that common factor and leaves what is not shared. This is why corporate debt is quoted as a spread rather than as a yield: a spread can widen on a day the corporate yield fell, if the government yield fell further, and that widening is the meaningful fact even though the headline yield went the other way.

Two things go wrong regularly. The first is comparability. A spread only isolates one thing when everything else about the two securities is close enough to cancel, so a difference taken across currencies carries the interest rate differential between them as well, and a difference taken across maturities carries the slope of the curve. The second matters most for readers arriving from a trading platform: this is not the bid ask spread, which is the distance between two prices for one instrument at one moment and is a dealing cost. A yield spread is a comparison between two different securities and costs nothing. Practitioners also disagree about what a credit spread should be measured against, the government curve or the swap curve, and the choice changes the number without changing anything about the security.