Quality spread

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Quality spread

Difference between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating. For instance, the difference between yields on Treasuries and those on single A-rated industrial bonds. Also called credit spread.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Quality Spread

The difference in the yield of two debt securities whose features are identical other than the differing creditworthiness of the issuers. Issuers with lower credit ratings must issue debt at a higher interest rate to compensate holders for the added risk of default. The quality spread can help potential bond investors make decisions as to whether the higher yield is worth the extra risk. See also: Quality Spread Differential.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
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The first method of measuring the market's pricing of credit risk is to look at the level of credit quality spreads, that is, the incremental yield the market pays to entice an investor to purchase securities of lower credit quality.
Business confidence has stabilized as well: Stock prices have risen, and market volatility and credit quality spreads remain low.
Friedman and Schwartz (1963) and Mishkin (1991) found that quality spreads historically have reflected financial turbulence.
The concern for quality spreads into the personal lives of Wynne and Hefner as well.
Terms and conditions of bank loans and capital market credit reflect these revised judgements about future profitability, and quality spreads have widened in recent months to the detriment of suspect firms.
This optimistic attitude has become especially evident in quality spreads on high-yield corporate bonds--what we used to call "junk bonds." In addition, banks have continued to ease terms and standards on business loans, and margins on many of these loans are now quite thin.
Financial markets digest these disparate viewpoints and reflect their net effect through prices, volume, quality spreads, and write-offs.
The performance of stock market prices and the relatively narrow quality spreads in debt markets attested to a considerable, degree of confidence among investors.
In many securities markets, quality spreads, when measured by the difference between rates on private and Treasury instruments of comparable maturities, have been quite thin.
Historically, many such indicators have come from the financial sector: Money supply growth, the slope of the yield curve, quality spreads, and credit flows are among the variables that have helped the monetary authorities over the years act in advance of developing problems.
The improvements in balance sheets, together with the beneficial effects of lower interest rates, have been reflected in reduced delinquencies on consumer loans and home mortgages, increased upgradings of firms' debt ratings, and narrowed quality spreads on corporate securities.

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