The differential between the yields on high and low quality bonds is an indicator of the health of the economy.

Question

Quizplus · Accepted Answer

This is because the differential between the yields on high and low quality bonds is an indicator of the perceived risk in the market. When investors are willing to take on more risk, the yield differential tends to narrow, indicating a stronger economy. On the other hand, when investors are more risk averse, the yield differential tends to widen, indicating a weaker economy.

The Differential Between the Yields on High and Low Quality