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Currency Conversion in Cross-Country Bond Yield Spreads

Article Quant Q&A · Author: julep
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Summary

The document asks why a vendor’s chart of the difference between US and UK ten-year government bond yields changes when the spread is displayed in pounds instead of left as a simple yield subtraction. The reported explanation is that the currency setting applies a cross-currency basis swap, so the converted spread reflects more than the raw difference between the two quoted yields.

This is a question rather than a worked explanation: it gives no swap mechanics, formula, market data, or numerical example. It therefore signals that a currency-adjusted comparison incorporates cross-currency funding or basis effects, but does not specify precisely how the chart constructs the measure. Readers should distinguish a direct yield spread from a spread expressed through a currency swap framework and consult the vendor’s methodology before interpreting the values.

Key ideas

  • A direct cross-country yield spread is the difference between the two bond yields.
  • Displaying that spread in another currency can apply a cross-currency basis swap adjustment.
  • The currency-adjusted series may differ in both appearance and value from the raw yield difference.
  • The document does not provide the calculation details needed to reproduce or interpret the adjusted series fully.

Tags

Fixed incomeMulti-assetForex
Full text
# What does it mean to change the currency of a spread between bonds from 2 different countries?


# What does it mean to change the currency of a spread between bonds from 2 different countries?












On reuters I charted the spread between the 10yr US bond and the 10yr UK bond. It gives the me the option of choosing the currency. For just the standard spread(ie: yield(US)-yield(UK)) you select none for currency option. You can also choose to display the spread in terms of pound. This changes the way the spread looks slightly and gives completely different values. I asked reuters support and they said that when you change the currency it performs a cross currency basis swap to the selected currency. Can anyone give any insight into what is going on here?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.