Glossarytaught in M7.03, FI1.07
Term spread
Also called term spreads, slope of the yield curve, curve slope.
The difference between a long-term and a short-term government bond yield, such as the ten-year yield less the two-year or the 91-day yield. Unlike the term premium, it is read directly from market prices, so anyone can compute it.
A ten-year government bond yielding 7.10% against a two-year yielding 6.40% gives a term spread of 70 basis points.
A term spread mixes two things: what the market expects short rates to do, and the term premium investors demand for holding longer bonds. A spread that turns negative, an inverted curve, has preceded many US recessions because it usually means short rates are expected to fall. Splitting the spread into its two parts needs a model. So published term premium estimates differ, while the spread itself doesn't.
Compute it, then ask what it contains.
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