bond spreads

[SanMiguel]

I notice a lot of talk about bond spreads in the market. The norm seems to be to compare them to the German bonds (particularly Irish at the moment but a few months back it was Greece).
Is the idea to go long of one market and short of the other or is it just an indicator as to the relevant strength of a country?

 

[Martinghoul]

It's can be either or both...

 

[SanMiguel]

It's can be either or both...

So, you would go long on the one with higher yield and short on the one with low yield?
Guess you have to know if the country is in trouble or not. Longing Irish or Greek bonds might cause issues even though presumably their yield is higher?

 

[Martinghoul]

So, you would go long on the one with higher yield and short on the one with low yield?
Guess you have to know if the country is in trouble or not. Longing Irish or Greek bonds might cause issues even though presumably their yield is higher?

Well, you'll go long the one you think is cheap vs selling the one that you think is expensive. Whether the one you think is cheap is the one with higher yield at the moment depends on your view. For example, optimists might buy Greece and sell Germany, picking up arnd 800 basis points (if they do it in 10yrs). On the other hand, if you believe a Greek default is inevitable somewhere down the road, you probably want to sell Greece, buy Germany, regardless of the yield differential.

It is as you say, indeed.