What is the Spread? How it works and what are the real consequences

The spread is now on everyone’s lips, but do you know what it is and what are the real consequences of its value? Here are all the answers you were looking for.

The spread is the difference in yield between two government bonds and its value is important because it can have consequences on our economy, let’s see which ones.

What is the spread

Spread is an English term and translated means “gap”. It is the difference between the yields of two different government bonds. If a security has a yield of 5% and the one with which the comparison is made yields 2%, we will say that the spread is equal to 3 percentage points (5 minus 2), or rather 300 basis points. The basis points are the hundredth part of a percentage point, the 0.01% in short, therefore the 3% is made up of 300 basis points.

European BTP bund spreads

In our country, we measure the spread by comparing the yield of BTPs ( ten-year) with German bunds (ten-year government bonds). This is because German government bonds are considered the most reliable in Europe.

The lower the gap between these two stocks, the more stable and reliable the country’s economy is, as it approaches the stability of the German economy.

The more the gap grows, the more our economy is considered unstable or potentially unstable.

The alarm is triggered in particular when certain thresholds are exceeded, such as that of 300 basis points, which provide a signal to investors about the possibility of lending money to our country by purchasing its government bonds.

The increases in the spread, determined by the financial markets, depending on the fact that investors on insurance policy numbers & believe that our public debt will continue to grow and are therefore willing to buy our government bonds only if offered with high yields. A real vicious circle is created, as we will see by illustrating the consequences.

The consequences of an increase in the Spread

Now let’s see in the summary, what are the practical consequences of the excessive increase in the spread:

  • the first we have already seen, investors, typically other European countries, receive a message of poor stability of the economy and therefore will be discouraged from buying our BTPs if not with very high yields;
  • the increase in the yields on our securities entails an increase in public debt (the debt that our country has with other states, individuals, and banks) since additional funds will be needed to finance this debt;
  • the financing of the public debt has direct consequences on the increase of taxes or the reduction of the state services to the citizens, probably through the DEF, since the state has to raise the funds somehow;
  • The interest rates on loans and mortgages are also affected, making access to credit more complex with consequences on consumption and the real estate market, which inevitably slow down.

In essence, the excessive increase of this indicator can cause a general slowdown in the country’s economy and therefore a more or less profound crisis phase.

Spreads, mortgages, and loans

Let us pause for a moment on the consequences of the spread of mortgages.

No, your mortgage payment will not increase tomorrow because the spread exceeded 300 basis points this week.

The repercussions are not immediate and do not concern loans and mortgages already in progress.

Mortgages are based on different indicators independent of the spread:

  • those at fixed rates are based on the European Eurirs interest rate (rate determined by the federation of European banks to cover the interest risk);
  • those at variable rates are based on the Euribor (interbank bid rate in euros).

These rates are independent of the trend of the public debt, therefore there are no repercussions for existing mortgages and loans.

It will be different for future mortgages and loans since banks will be able to revise their spread upwards, i.e. the difference between the above rates and the actual interest rate applied, since they may need to cover possible capital losses, therefore losses. , deriving from having invested in government bonds. This is a consequence of the increase in the spread between BTPs and German bunds.

The spread rate today

You can follow the trend in the value of the spread, which fluctuates daily, on the various and foreign sites dedicated to finance. The data is updated throughout the day, from the opening to the closing of the European stock exchanges. We suggest the dedicated page of Il Sole 24 Ore

Instead, continue to follow us to find out about all the news that could emerge following significant fluctuations in the spread.

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