The effect of interest rates and spreads in the stock market with demonstration on the Bloomberg Terminal, the $24K software used by hedge funds : eupersonalfinance

Why are spreads important? The spread is the difference in interest rate payed out between two different assets. But the spreads that are especially taken in consideration by economists and regulators are the spreads between different government bonds. In order to calculate these spreads are usually used bonds that are considered risk-free like the US Treasury Bond or the German Bund. On the other side we take government bonds of countries that are considered riskier. The increase in the spread of the returns between the two financial products are usually sign of fear in the market place towards the riskier country’s ability to pay out its debt. For example, spreads between Germany and southern Europe countries strongly increased during the sovereign debt crisis that followed the financial crisis of 2008 and 2009. When fear comes into place investors sell off bonds of risky issuers which causes interest rates to go even higher and making the crisis even worse, until a regulatory entity steps in. In the case we made previously, it was the European Central Bank which solved the problem. A strong rise in interest rates can cause very bad consequences for the overall economy because both individuals and companies will have to pay higher interests on their debts. This causes people to consume less and, in the end, people start losing jobs and companies go bankrupt and default on their debts. This means that it’s very important to insure stability. If the rise in interest rates is dictated by the central bank instead, it’s usually done in order to contrast inflation so that people are more incentivized to save money rather than spending and using less leverage. This also pushes investors to go from riskier investments like stocks to safer bonds. This usually causes a drop in equities prices.

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