What is a Fixed Income Hedge Fund Spread?
(January 5, 1999) A spread is a relationship between two securities, instruments, or markets. It is usually determined by the arithmetic difference between yields on two fixed income securities or between 2 prices for futures contracts. For example, if a benchmark treasury bond is yielding 4.81 percent and the referenced mortgage backed security is yielding 5.00 percent then there is a 19 basis point (bp) pickup for owning the mortgaged backed instrument relative to owning the treasury bond. This 19 basis point difference is also the spread between the two instruments at that moment in time. Assume that events are such that the treasury yield declined to 4.75 percent but the mortgage backed security sold off in price. This market decline in the MBS price would boost its yield to say 5.25 percent. Then the new mark-to-market spread would be 50 basis points. Depending on the effective durations – or even maturities – of the two securities, there can be significant dollar swings. What doe
