The credit spread is the difference between the yield on a corporate or non-government bond and the yield on a risk-free government bond of the same maturity. It reflects the market's assessment of credit risk, liquidity, and, to some extent, supply and demand for the issuer. Spreads are quoted in basis points (one basis point equals 0.01 percentage point).
Investors compare spreads across issuers, sectors, and maturities to gauge relative risk and return. A wider spread implies higher credit risk or lower liquidity, while a narrower spread suggests lower perceived risk or better liquidity, all else equal. Spreads can widen during market stress and tighten when credit conditions improve. In practice, spreads help inform relative value judgments and guide decisions about pricing expectations for new issues or for monitoring a bond portfolio. Benchmarks and measures such as option-adjusted spread (OAS) or Z-spread provide more nuanced views when bonds contain options or when a consistent curve is used for pricing.
Credit spreads vary with credit ratings, sector, and macro conditions. They are sensitive to changes in default expectations and liquidity in the fixed income market and are commonly quoted for segments such as investment-grade and high-yield bonds.
For example, a 5-year corporate bond yields 4.75% while the 5-year U.S. Treasury yields 2.75%; the credit spread is 200 basis points.
Yield · Basis points · Credit risk · Bond yield · Credit rating · Option-adjusted spread (OAS)