“Yield spreads” explained for you


Chinese investors are pouring money into bonds. Of course they are. That’s what you do when your main stock market index has fallen over 20% in the last six months. 

Why? Bonds are “safe.” You loan your money to the government (or a company) for a certain period of time, collect interest during that time, then you get your money back if all goes as planned. That’s what happens when you buy a bond (or a bond fund that buys bonds for you).

Demand for Chinese bonds by Chinese investors has skyrocketed.

The problem is, interest rates that *companies* pay you to loan them money in China (buy their bonds) should be a lot higher than the interest rate the government pays you. Companies are riskier than governments so you need to be compensated for loaning your money with higher risk.

“Narrowing the yield spread” noted below highlights this issue: corporate bond interest rates/yields are artificially low, too low.

Credit spreads in China - debt

Funds that you invest in that buy emerging market bonds have made over 6% this year. Why? Because interest rates have been artificially decreasing. Sounds awesome!

Drops mic. No.

When interest rates on corporates bonds increase to normal levels, bye bye gains.

We’re done here. Class dismissed. ​