Fixed Income
Credit Spreads
Credit spreads measure how much extra reward investors require for taking on the risk that a borrower might not repay. A wider spread signals rising concern about defaults; a narrower spread signals confidence.
Spreads tend to tighten when the economy is strong and liquidity is abundant, and to blow out during stress when investors flee riskier debt. Because credit markets often sense trouble before equities do, spreads are a valued early-warning indicator.
Following high-yield and investment-grade spreads gives a window into the financial system's health and into whether capital is flowing toward or away from risk.
Example
When high-yield credit spreads widen sharply, it often warns that investors are bracing for economic trouble.
Credit Spreads — FAQ
What is Credit Spreads?
A credit spread is the extra yield investors demand to hold a corporate or riskier bond over a comparable-maturity government bond, compensating for default risk.
Can you give an example of Credit Spreads?
When high-yield credit spreads widen sharply, it often warns that investors are bracing for economic trouble.
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