Concept of yield spreads, Financial Management

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  • The Central Bank is an authority responsible for monetary policy of its country. It regulates money supply and credit, issues currency, and manages exchange rate.  It strives to maintain the stability of its national currency and money supply. It works with different policy tools like open market operations, bank reserve requirements, interest rate policy, capital requirements, exchange requirements, etc.

  • Treasury yield curve is the curve pertaining to treasury securities. It is the most common yield curve used as a base rate for its high liquidity and riskless nature.

  • Yield spread can be measured in terms of either absolute yield spread or relative yield spread. A yield spread between any two bond issues can be easily computed when the maturity date for both these issues is same.

  • Liquidity spreads are the spreads visible in the secondary markets for treasury securities. On-the-run treasuries are the treasury securities wherein the liquidity spread is more visible by virtue of its less liquidity and frequent trading in the secondary markets.


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