Economy & context
A credit spread is the yield difference between a credit-risky instrument and a chosen lower-risk benchmark after matching relevant terms. It reflects expected loss, uncertainty, liquidity and risk appetite.
Make it click
Two loans mature together, but one borrower is less certain and harder to sell. The lender asks for an extra rate above the stronger reference promise.
Now put that into markets
Corporate bond spreads are quoted over government or swap curves using several conventions. Spread changes move bond prices even when benchmark rates are stable.
Option-adjusted spread accounts for embedded options through a model. Observed spread generally exceeds simple expected default loss because it contains other premia.
Name benchmark, duration, seniority and spread convention. Compare with issuer fundamentals and historical regimes.
Wide spreads can widen further, and narrow spreads can reflect complacency. Cross-market comparisons fail when benchmarks differ.
Takeaway
