Credit Spread

A credit spread, also called a yield spread, is the difference in yield between two bonds of similar maturity but different credit quality, most commonly used to describe the gap between the yield on corporate or high yield bonds and the yield on a comparable maturity government bond treated as risk free. A wider spread signals that investors are demanding a larger risk premium for holding the riskier debt, generally reflecting greater perceived default risk or economic uncertainty, while a narrowing spread signals improving confidence in borrowers' ability to repay. Because credit spreads tend to widen sharply during financial stress and market downturns, they are watched as a real time barometer of market sentiment toward credit risk.