101 Concepts for the Level I Exam
Concept 87: Factors that Influence the Level and Volatility of Yield Spreads
- Credit cycle: Credit spreads narrow when the credit cycle improves; and they widen when the credit cycle is weakening.
- Broader economic conditions: Credit spreads widen in a weak economy and tend to narrow in a strong economy.
- Market performance: Credit spreads widen in weak financial markets and tend to narrow under stable market conditions.
- Broker-dealers’ willingness to provide sufficient capital for market listing: Unlike stocks that primarily trade on exchanges, bonds trade over-the-counter. Brokers and dealers are market makers in the debt market. Credit spreads tend to narrow if the availability of capital from broker/dealers is high.
- Supply and demand: If the supply is more and demand is less, credit spreads will widen.
Yield spreads on lower-quality issues will be more volatile than spreads on higher quality issues.