Question

What is yield spread and its relationship to equity prices, inflation, and real output(GDP)?

Answer 1

Ans.

Yield spread refers to difference between the yield of two instruments . In general yield spread is referred as the difference between the US Treasury bonds and any other instrument being measured.  

Sovereign yield spread alludes to a gauge of the nation spread (nation equity premium) for a creating country that depends on a correlation of bonds yields in nation being dissected and a created nation. The sovereign yield spread is the contrast between a government bond yield in the nation being broke down, named in the money of the created nation, and the Treasury bond yield on a comparable development bond in the created nation.

Required yield spread The distinction between the yield-to-development on another bond and the benchmark rate; extra remuneration required by financial specialists for the distinction in hazard and duty status of a bond comparative with a government bond.. Sometimes called the spread over the benchmark

Yield spreads keep changing , higher the risk higher the yield spread. Also yields are based on the forecast for the inflation and economic growth . Lower the inflation means will increase the real return of the bond so the prices of the bond will increase and yield will decrease and vice versa.

If expectation for growth is low the yields spread will also be low and vice versa

During the growth phase of the economy the equity and yield spread go contra directions i.e. if the stock market is doing well , yields will go down because the capital may move from bonds to stocks and vice versa.