ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Yield Spread and Industrial Activity

Two explanations are usually offered for the empirical relationship between yield spread and economic activity. One, yield spread may reflect the monetary policy stance, and two, it mirrors market expectations of a pickup in economic activity in the future. Using growth in the index of industrial production as a proxy for economic activity, it is seen that the gilt yield spread is able to predict the growth in IIP with a six-month lag. The data on recent movement in bond spreads for different maturities and issuer groups reveals that bonds of non-banking financial companies have the highest spread in all maturities, reflecting a higher risk perception of investors. Public sector units and banks enjoy the lowest spread, signalling a higher level of investor confidence.

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