Glossary
Credit Spread
The extra yield a corporate or other risky bond pays over a Treasury of similar maturity, reflecting perceived credit risk.
A credit spread is the difference between the yield on a bond with default risk, such as a company's bond, and the yield on a US Treasury that matures at about the same time. It is the extra pay investors demand for lending to someone who might not pay them back, and it is usually quoted in basis points.
How it is calculated
Professionals often use the option-adjusted spread (OAS), which strips out the value of features such as call provisions so bonds with different structures can be compared.
What spreads signal
- Issuer quality. A higher-rated Investment grade bond typically trades at a narrow spread; a Junk bond trades much wider.
- The economic mood. Spreads across the whole market widen when investors fear a Recession and defaults, and narrow when they feel confident. In March 2020, high-yield spreads more than doubled within weeks.
- Total return. A bond's price can fall because Treasury yields rose, because its spread widened, or both. Separating the two shows whether the issue is rates or credit.
A different meaning in options
In options trading, "credit spread" means something else: selling one option and buying a cheaper one of the same type and expiry, so the trade opens for a net credit. That is covered under Credit spread (options).