Credit Spread.
A definition, in plain English — with the books that teach it.
What it means
A credit spread is the difference in yield between a bond and a comparable risk-free benchmark — typically U.S. Treasuries of the same maturity. It represents the extra return investors demand for taking on the issuer's credit risk (the possibility of default or delayed payment). Spreads widen during economic stress as investors price in higher default probabilities, and compress in strong markets. Credit spreads are a real-time barometer of market sentiment and risk appetite, tracked closely by fixed-income managers, economists, and equity analysts.
Example
A BBB-rated corporate bond yields 6.5% while the 10-year Treasury yields 4.2%. The credit spread is 2.3 percentage points (230 basis points). When recession fears spike, that spread might widen to 400 basis points, causing the corporate bond's price to fall even if Treasury rates stay flat.
