Credit Spread

A credit spread is the difference in yield between a non-Treasury bond and a Treasury security of the same maturity. It represents the additional compensation investors demand for bearing credit risk — the possibility that the issuer may default or be downgraded.

Credit spreads vary by:

• Credit quality: investment-grade corporates (BBB and above) carry smaller spreads than high-yield (below BBB). Investment-grade spreads are typically 80-200 bps; high-yield spreads range from 300-800+ bps.
• Maturity: longer-maturity bonds generally have wider spreads due to greater default uncertainty over time.
• Sector: financials, utilities, and industrials carry different spread levels reflecting their risk profiles.

Credit spreads are procyclical:

• Tightening spreads signal improving economic conditions, risk appetite, and credit quality expectations
• Widening spreads signal deteriorating conditions, risk aversion, and rising default concerns
• Spread blowouts occur during financial crises — investment-grade spreads exceeded 600 bps in late 2008

The Treasury yield curve provides the risk-free baseline against which all credit spreads are measured. Movements in credit spreads can offset or amplify Treasury yield changes, affecting the total yield on corporate bonds independently of Fed policy.

The blog posts "Adding Resilience to 60-40 Portfolios" and "Asset Returns During Various Yield Curve Regimes" analyze how credit spread sectors (investment grade, high yield) perform across different rate environments.