What is a credit spread
A credit spread is the extra yield investors demand to hold a bond with default risk instead of a safer bond with the same maturity and currency.
The safe benchmark is usually a government bond of the same currency, such as a US Treasury for dollar bonds. Spreads are normally quoted in basis points, where a basis point is a hundredth of a percentage point.
Do not confuse this with the spread on a trading platform. That is the gap between the bid and ask price of an instrument, not a gap between bond yields.
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Worked example (hypothetical)
Take a government bond and a corporate bond. Both mature in the same year, are in the same currency, and pay fixed coupons.
- The government bond yields G.
- The corporate bond yields C, which is higher than G because the company could default.
- Credit spread = C − G.
Suppose the government yield stays at G but news about the company's debt pushes the corporate yield higher. The spread widens, so the market sees more risk of default. If the corporate yield falls back towards G, the spread narrows.
The same logic applies to countries. A sovereign dollar bond from an emerging market, such as a Eurobond, is often quoted as a spread over US Treasuries of similar maturity.
Where you see the term
- Financial news: phrases like "spreads widened" or "high-yield spreads tightened" describe how much extra yield risky borrowers must pay.
- Bond reports and fund factsheets: spreads appear by rating bucket (investment grade, high yield) and by sector.
- Central bank and market stability reports: widening spreads are a common sign of stress, a credit crunch or financial contagion.
- CFD and forex traders: credit spreads are used as background in fundamental analysis. Sharp widening often comes with a flight to quality. Leveraged CFD trading can lose money fast when markets move like this.
Precise definitions and edge cases
The general term covers several measures:
| Measure | What it compares |
|---|---|
| G-spread | Bond yield minus an interpolated government bond yield |
| I-spread | Bond yield minus the swap rate of the same maturity |
| Z-spread | Constant spread added to the whole benchmark curve so the discounted cash flows equal the bond price |
| OAS (option-adjusted spread) | Z-spread with the value of embedded options, such as a call feature, removed |
| CDS spread | Annual premium for credit default swap protection on the issuer |
Edge cases:
- Maturity mismatch: if no benchmark matches the maturity exactly, the benchmark yield is interpolated. A loose match distorts the spread, and bond duration matters here.
- Liquidity premium: part of the spread pays for being hard to sell, not only for default risk.
- Callable bonds: the raw yield spread overstates credit risk, so OAS is used instead.
- Negative spreads: these are rare but possible, for example when a strong company trades below a weaker sovereign.
- Options strategy: in options, a "credit spread" also means selling an option and buying another of the same type, so the trader receives a net premium. It is a separate meaning; see call option.
Related terms
Basis point · Default · Coupon · Face value · Bond duration · Counterparty · Credit crunch · Trading glossary
Frequent questions
What does it mean when credit spreads widen?
Investors want more extra yield to hold risky debt, which usually reflects higher perceived default risk or weaker liquidity.
Is a credit spread the same as a bid-ask spread?
No. A credit spread compares yields of different bonds. A bid-ask spread is the gap between buying and selling prices of a single instrument.
Which benchmark is used for credit spread bonds?
Usually a government bond of the same currency and maturity. Swap rates are used for the I-spread.
Is the credit spread only about default risk?
No. It also includes a liquidity premium and, for bonds with embedded options, the value of those options unless OAS is used.