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Spread Product

Definition of 'Spread Product'

Spread product is the unfortunate term for taxable (as opposed to municipal) bonds that are not Treasury securities. Agency securities, asset-backed securities, corporate bonds, high-yield bonds and mortgage-backed securities are various types of spread product.

The bonds are called spread product because they are evaluated by the professionals who buy and sell them based on the difference between their yield and the yield of a comparable Treasury security. That difference is called a spread. For example, if a 10-year corporate bond is trading at a yield of 4% and the 10-year Treasury note is trading at a yield of 2%, the corporate bond is said to offer a 200 basis-point spread.

It's the spread that matters rather than the absolute yield on the corporate bond because corporate bonds involve credit risk and Treasuries don't. Consider: A corporate bond yielding 4% offers far more reward for the risk when the comparable Treasury is yielding 2% than when the comparable Treasury is yielding 1%.

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