Credit Spread

The credit spread is the gap between a corporate bond's yield and that of a government bond of the same maturity. It is the price the market puts on the risk of the company failing.

Spreads narrow in good times. With defaults rare, risk is priced low and more investors accept a small premium to hold corporate debt.

They widen sharply when anxiety rises. Nobody wants risky bonds, so yields spike — which is why the credit spread serves as a thermometer for market fear.

It sometimes moves before share prices. Bond investors focus on whether a company can repay, making them more sensitive to signs of deteriorating finances.

For investors, an unusually narrow spread deserves caution. It means the extra interest is thin relative to the risk taken, and losses grow quickly when conditions change. Indices tracking the average spread across a market also exist. A rapid widening signals that funding conditions are deteriorating. It is a signal easily missed by watching equities alone.