Term Spread is a term used in financial markets, particularly in bond markets. It refers to the difference between interest rates on bonds with different maturities.
Bond interest rates vary based on factors such as a country’s economic conditions, inflation expectations, and monetary policies. The difference between interest rates on bonds with different maturities is an indicator of investors’ risk perception and expectations.
Typically, long-term bond interest rates are higher than short-term bond interest rates. This is because investing in long-term bonds involves more risk and higher liquidity risk. In this case, the Term Spread is expressed as positive.
However, there can also be situations where the opposite occurs. For example, during periods of economic uncertainty or due to the impact of monetary policies, short-term bond interest rates may be higher than long-term bond interest rates. In this case, the Term Spread is expressed as negative.
Term Spread can be an important indicator for investors. A positive Term Spread can indicate economic growth and investment opportunities, while a negative Term Spread can reflect expectations of economic downturn or uncertainty. By monitoring the Term Spread, investors can assess the risk perception in the bond market and make investment decisions accordingly.