Credit Spread

Credit spread is the difference in yield between two bonds of similar maturity but different credit quality, typically measured between corporate bonds and risk-free Treasury securities. It represents the additional yield investors demand for taking on credit risk. For example, if a 10-year Treasury yields 3% and a 10-year corporate bond yields 5%, the credit spread is 200 basis points (2%). Credit spreads widen during economic uncertainty as investors demand more compensation for risk, and narrow during stable periods. Investment-grade bonds typically have spreads of 50-200 basis points, while high-yield bonds can have spreads exceeding 500 basis points. Credit spreads are key indicators of market sentiment and economic health. During the 2008 crisis, some corporate bond spreads exceeded 2,000 basis points. Traders use credit spreads for relative value analysis and to hedge credit risk.