What is a credit spread (bonds)?
In one line: A credit spread is the extra yield a company or riskier bond pays above a US Treasury bond of the same length, as payment for added risk.
A simple example
Lending to a company is riskier than lending to the US government. So company bonds have to pay more. The gap is the credit spread.
Say a 10-year US Treasury yields 4.0%. A 10-year bond from a company yields 5.5%.
- Credit spread = 5.5% − 4.0% = 1.5 percentage points.
- Traders say 150 basis points. One basis point is 0.01%.
The riskier the borrower, the wider the spread. A strong company might pay 100 basis points over Treasuries. A shaky one, often called "high yield" or "junk," might pay 400 or more.
These numbers are an illustration. Real spreads change every day.
Why it matters
Credit spreads are a mood gauge for the whole market.
- Spreads widen when lenders get nervous. They demand more pay to take risk. This often shows up in Risk-on and risk-off swings and ahead of a Recession.
- Spreads narrow when lenders feel calm and confident.
Many traders watch spreads alongside stocks. If stocks rise but spreads keep widening, the bond market is telling a more cautious story.
A common mistake
Mixing up the two "credit spreads." In options, a credit spread is a trade where you sell one option and buy another for a net premium. In bonds, it's the yield gap described here. Same name, different things.
The comparison only works on bonds of similar length. Compare a 10-year company bond with the 10-year Treasury, not the 2-year.
Questions
What does a widening credit spread mean?
Investors want more extra yield to lend to companies. It usually signals more worry about defaults or the economy.
What is a basis point?
One hundredth of a percentage point, or 0.01%. So 1.5% is 150 basis points.
Where can I see credit spreads?
Many charting sites and the St. Louis Fed's FRED database publish corporate bond spread series you can chart.
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