Credit Spread
The yield difference between a corporate (or other non-government) bond and a Treasury of the same maturity — the market's price for credit risk.
Formula
Credit Spread = Corporate Bond Yield − Treasury Yield (same maturity)
A credit spread is the additional yield an investor demands above the risk-free Treasury rate to compensate for the possibility of default. A BBB corporate bond yielding 5.50% when the 10-year Treasury yields 4.50% has a 100 basis point (1%) credit spread.
Credit spreads are a real-time barometer of risk appetite. Tightening spreads (spreads narrowing) signal confidence and risk-on conditions — investors are comfortable taking credit risk. Widening spreads signal fear, deteriorating fundamentals, or flight to safety.
The high-yield spread index (ICE BofA HY Index) is particularly watched as an early warning indicator for equity markets. A sharp spike in HY spreads often precedes equity selling and tightening credit conditions across the economy.
Related Terms
Basis Point
One hundredth of one percentage point (0.01%) — the standard unit for quoting changes in interest rates, yields, and credit spreads.
BeginnerBond Yield
The return an investor earns by holding a bond — driven by its price, coupon, and time to maturity. Moves inversely with price.
BeginnerCorporate Bond
Debt issued by a company to raise capital, paying a coupon above Treasuries to compensate investors for credit risk.
BeginnerCredit Default Swap (CDS)
A derivative that pays out if a borrower defaults — effectively insurance on a bond, with its premium acting as a live market price of credit risk.
AdvancedCredit Rating
A graded assessment by agencies like Moody's, S&P, and Fitch of an issuer's ability to repay debt — the standardized scale for default risk.
BeginnerDefault Risk
The probability that a bond issuer will fail to make scheduled interest or principal payments — the core credit risk in fixed income.
IntermediateHigh-Yield Bond
Bonds rated below investment grade (BB+/Ba1 or lower) — offering higher yields to compensate for elevated default risk.
IntermediateInvestment Grade
Bonds rated BBB-/Baa3 or above by major rating agencies — considered low enough default risk for institutional investors and pension funds.
IntermediateMortgage-Backed Security (MBS)
A bond backed by a pool of home mortgages, passing borrower payments through to investors — and a key target of Fed QE.
AdvancedReal Yield
A bond's nominal yield minus expected inflation — the true inflation-adjusted return a bondholder earns for lending money.
AdvancedTreasury Security
Debt issued by the U.S. federal government through the Treasury Department — the benchmark risk-free asset in global finance.
Beginner