Credit ratings and credit spreads: how bond risk is priced

A credit rating is a letter grade that says how likely a borrower is to pay its debts in full and on time. A credit spread is the extra yield a bond pays over a US Treasury, the benchmark investors treat as free of default risk. The two are linked. The rating is an agency's opinion about credit risk, and the spread is the price the market actually charges for it, updated every trading day.

Ratings decide which bonds pension funds, insurers and many bond funds are allowed to hold, so a single downgrade can force selling. Spreads tell you how worried lenders are about defaults across the whole economy. In October 2008 high-quality corporate bonds yielded about 5 percentage points more than the 10-year Treasury, on the US Treasury's own corporate yield curve. In September 2026 the gap was 0.87 points. This guide explains how the rating scales work, who issues ratings in the US, how spreads are measured, and what four decades of spread data show.

What a credit rating measures

A rating agency studies an issuer's finances, industry, debt load and the legal terms of the bond, then assigns a grade that ranks its default risk against every other issuer it rates. The grade is relative, not a probability. AAA does not mean "zero chance of default," and BB does not mean any particular percentage. It means "less likely to default than BBB-rated debt, more likely than B."

Agencies rate two different things:

• The issuer. A company or government's overall ability to meet its obligations.
• Each bond issue. A specific bond can sit above or below the issuer rating. A secured bond backed by collateral may be rated higher than the company; a subordinated bond that is repaid only after senior lenders may be rated lower.

There are separate scales for short-term debt such as commercial paper, but most investors mean the long-term scale when they talk about ratings.

The rating scale

The three largest agencies use two spellings of essentially the same ladder:

• S&P Global Ratings and Fitch use capital letters: AAA, AA, A, BBB, BB, B, CCC, CC, C and D. They add a plus or minus to the categories from AA through CCC, so AA+ ranks above AA, which ranks above AA−.
• Moody's uses Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C. It adds numerical modifiers 1, 2 and 3 from Aa through Caa, where 1 is the top of the category and 3 the bottom.

Each step, such as A+ to A, is called a notch. The single most important boundary is between BBB− (Baa3) and BB+ (Ba1). Above it is investment grade; below it is speculative grade, the market's "high yield" or "junk" bonds. The Corporate and high-yield bonds: how company debt behaves guide covers how the two halves of the market behave.

Agencies also publish an outlook (positive, stable or negative) that signals the likely direction of the next rating change, and can place a rating on review or watch when an event such as a merger may change it soon.

Who rates bonds in the US

US securities law gives a special status to nationally recognized statistical rating organizations (NRSROs), agencies registered with the SEC and overseen by its Office of Credit Ratings. As of the SEC's list updated October 21, 2026, there are 11: A.M. Best Rating Services, Clasificadora de Riesgo Pacific Credit Rating, DBRS, Demotech, Egan-Jones Ratings, Fitch Ratings, HR Ratings, Japan Credit Rating Agency, Kroll Bond Rating Agency, Moody's Investors Service and S&P Global Ratings.

Most large bond issues carry ratings from two or three of the biggest agencies. When they disagree, investors talk about a split rating, and index providers and fund managers apply their own published rules to decide whether such a bond counts as investment grade.

One feature of the business is worth knowing: in the common issuer-pays model, the company selling the bonds pays for the rating. Keep that in mind when a rating looks generous next to the bond's market spread.

What a credit spread is

A bond's yield is the return you earn if you buy at today's price and every payment arrives as promised. A Treasury with the same maturity offers that return with no meaningful default risk, so the spread is what investors demand for taking the issuer's credit risk. It covers three things:

1. Expected default losses. The chance the issuer stops paying, multiplied by the share of your money you would lose after any recovery in bankruptcy.
2. A risk premium. Defaults cluster in recessions, exactly when investors least want losses, so they ask for more than the average expected loss.
3. Liquidity. Most corporate bonds trade less often than Treasuries, and selling one in a hurry costs more.

A spread can be quoted against a single Treasury of matching maturity, against an interpolated point on the Treasury curve, or as an option-adjusted spread (OAS) that strips out the value of a call feature. Index providers publish OAS for whole market segments. The Credit Spread glossary entry gives the short definition.

Four decades of spreads

The chart subtracts the 10-year Treasury yield from the US Treasury's 10-year HQM corporate yield. Treasury builds the HQM curve from high-quality corporate bonds rated AAA, AA or A, mainly to supply discount rates for pension liabilities, so it describes the upper half of the investment-grade market. Computed from the monthly data:

The median spread over 1984–2026 was 1.18 points. Three patterns stand out:

• Spreads spike in panics. In October 2008 the Treasury yield fell as investors bought safety, while high-quality corporate yields jumped to 8.85%; the gap reached 5.04 points, more than twice the next-highest peaks, in 2001 and 2020. Spikes widen far faster than they narrow. See The 2008 financial crisis: housing, Lehman, TARP and the 57% fall and The COVID crash of 2020: the fastest bear market and recovery.
• Rising Treasury yields did not mean wider spreads. From December 2021 to October 2022 the 10-year Treasury yield climbed from 1.47% to 3.98%, yet the spread moved only from 1.14 to 1.85 points. In September 2026, with the 10-year near 5%, it was 0.87. Treasury yields and credit spreads are separate risks; together they make up a corporate bond's yield.
• Calm stretches are long. The spread stayed between 0.84 and 1.13 points from January 2004 to June 2007, just before the financial crisis, and between 0.78 and 1.05 points from January 2024 to September 2026.

How to read ratings and spreads together

Spreads lead, ratings follow. Agencies aim for stable ratings that look through the business cycle, so they change grades in steps, months after the bond market has moved. A bond whose spread has widened far beyond others with the same rating is telling you the market expects a downgrade.

The BBB cliff. Many investors are allowed to hold only investment-grade bonds. A bond cut from BBB− to BB+, called a fallen angel, can be sold by those holders at the same time, pushing its price below what the credit change alone would justify.

Tight spreads are thin protection. At 0.87 points in September 2026, the high-quality spread left less room to absorb losses than its 1.18-point median. That is a description of compensation, not a forecast; spreads have stayed near tight levels for years at a time in the data.

Pitfalls and limitations

• Ratings can be wrong, and late. Structured mortgage securities rated AAA before 2008 suffered large losses. A rating is an opinion based on information available at the time.
• Same rating, different risk. Two BBB bonds can carry very different spreads because of industry, maturity, seniority, call features or liquidity.
• Ratings don't measure interest-rate risk. A AAA bond with a 30-year maturity can lose far more in a rate rise than a BB bond maturing next year. Interest-rate sensitivity is covered in Bond duration and convexity: measuring interest-rate risk.
• Index spreads are averages. A headline spread hides a wide range across issuers, and the bonds in an index change over time as ratings move.
• Yield is not return. A high spread is the promised extra; defaults decide how much of it you keep.

Credit risk compared with neighboring bond risks

How Finabase does it

Finabase does not carry credit ratings or individual corporate bond data, and it does not chart credit spreads. What the app does show is the other half of every spread: the Treasury yields table lists US Treasury yields from 1 month to 30 years, and each maturity has its own page, such as the 10-year Treasury yield. Corporate bond exposure appears through exchange-traded funds: the LQD (investment-grade corporates) and HYG (high-yield corporates) symbol pages have price charts, and their Dividends & splits tab lists the monthly distributions that make up most of a bond fund's return. The spread chart on this page is ours, built from public US Treasury and Federal Reserve data published on FRED.

Frequently asked questions

What credit rating is investment grade?

BBB− or higher at S&P Global Ratings and Fitch, or Baa3 or higher at Moody's. Bonds rated BB+ / Ba1 or below are speculative grade, commonly called high-yield or junk bonds.

What does a wide credit spread mean?

It means investors are demanding much more yield than Treasuries pay to lend to that borrower or market segment, usually because they see a higher risk of default or are less willing to hold risky, less liquid bonds. Spreads widened sharply in late 2008 and in March 2020.

How many credit rating agencies are there?

There are many worldwide, but in the US the SEC lists 11 nationally recognized statistical rating organizations as of October 2026. S&P Global Ratings, Moody's and Fitch are the largest.

Can a bond's rating change after I buy it?

Yes. Agencies upgrade and downgrade ratings as an issuer's finances change, and the bond's price usually moves with its spread well before the rating action. A downgrade does not change the bond's coupon, only what other investors will pay for it.

Summary

Credit ratings grade a borrower's default risk on a ladder from AAA / Aaa to D, with BBB− / Baa3 as the last investment-grade notch; in the US the agencies whose grades count under SEC rules are the 11 registered NRSROs. The credit spread is the market's running price for that risk: the yield a bond pays above a Treasury of similar maturity, covering expected losses, a risk premium and weaker liquidity. On the US Treasury's high-quality corporate curve, the 10-year spread over Treasuries ranged from 0.09 points in June 1984 to 5.04 points in October 2008, and stood at 0.87 points in September 2026, below its 1.18-point median. Lower-rated bonds pay wider spreads that swing harder in a crisis. Read ratings as slow-moving opinions and spreads as fast-moving prices, and remember that neither one measures interest-rate risk.