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Fixed income
Credit spread
The credit spread is the difference in yield between bonds of a similar maturity but with different credit quality. Spread is measured in basis points.
Definition of credit spread
Typically, the credit spread is calculated as the difference between the yield on a corporate bond and the benchmark rate. The yield on a government bond generally is considered to be a benchmark rate. The credit spread thus gives an indication of the additional risk that lenders take when they buy corporate debt versus government debt of the same maturity.
Changes in credit spread and market perceptions
Changes in the spread indicate that perceptions of the risk of a specific issuer has changed or that perceptions of general market conditions have changed. For example, if the market becomes more skeptical about the creditworthiness of an issuing company, the spread of that company’s bonds widens (its yield relative to the benchmark widens). Or, if markets become more negative and risk-averse, spreads in general tend to widen. Similarly, if sentiment towards an issuer or a market improves, the relevant spreads would decrease.
