Finance: What is Spread To Treasuries?

Spread to treasuries is an indication of risk associated with a given debt or bond offering.

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Transcript

00:21

bond offering In the investing world Everything is calculated as

00:25

some additional premium or additional cost or additional capital rental

00:31

percentage all tact on to the safest investment in the

00:35

world Things from the us treasury like t bills and

00:39

bonds stuff like that from treasury We'll think about it

00:42

like you're going to a restaurant looking at the dinner

00:45

salad there for three bucks It's the cheapest thing on

00:48

the menu if you wanted a steak Well that state

00:51

costs fif eighteen dollars but it's a spread or premium

00:55

to the dinner salad of twelve bucks right Three bucks

00:58

for the south and you'd have to add twelve from

01:00

state prize You get stick And if you really wanted

01:03

to just use smaller numbers so that your customers would

01:06

have the illusion that they were paying fewer box for

01:09

dinner well you could describe everything in your restaurant as

01:12

some spread to dinner salad such that this medium rare

01:16

rib eye was in fact simply a spread to salad

01:19

or premium of twelve bucks Even though you're paying fifteen

01:23

anyway Us treasuries air broadly considered to be the safest

01:27

bond bet in the world at least today until china

01:30

or robots or both take everything over So when a

01:33

bond offering is made it is priced relative to treasuries

01:37

in the same way dinner items would be priced relative

01:41

to that dinner salad house salad there with the oil

01:44

and vinegar dressing that is if the bond offering is

01:47

for say ten years than the u s treasury ten

01:50

year paper that moment would be the foundational elements against

01:54

which their risk your debt instruments would then be priced

01:58

So let's say that today that ten year treasury paper

02:02

is yielding three point two percent Caterpillar tractor wants to

02:05

borrow a billion dollars to build their new tractor smelting

02:09

plant there then offered by investors one hundred twenty basis

02:13

point spread to treasuries debt deal to a fund that

02:17

factory with a billion dollars of debt What does that

02:19

mean It means that lenders are willing tto loan caterpillar

02:23

A billion dollars payable in ten years at three point

02:27

two percent per year plus one point two percent for

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total interest of four point four percent interest per year

02:35

You know take it or leave it That's it So

02:37

to recap this is play bond magazine and this is

02:40

play But magazine reads it for the articles Really weird