Benchmark Bond
The most recently issued, most actively traded bond of a given maturity used as the reference rate for pricing other fixed-income securities.
What is Benchmark Bond?
A benchmark bond is the most recently issued and most actively traded government bond of a given maturity that serves as the reference standard for pricing other bonds in the same market. In the United States, Treasury benchmarks at key maturities (2-year, 5-year, 10-year, and 30-year) are used as reference rates; the 10-year Treasury note is the most widely followed benchmark globally. Corporate bonds, mortgage-backed securities, and other fixed-income instruments are typically priced as a spread in basis points above the matching-maturity benchmark. Benchmark bonds are usually on-the-run securities—the most recently issued bonds—which command a liquidity premium over older off-the-run bonds.
Example
When a AA-rated U.S. corporation issues 10-year bonds and the current 10-year Treasury benchmark yields 4.50%, the investment bank prices the corporate bond at T+120 (Treasury plus 120 basis points), for a yield of 5.70%. This spread reflects the additional credit risk of the corporate issuer relative to the risk-free U.S. government benchmark.