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Credit Spread

In short

Yield difference between corporate bonds and Treasuries — measures credit risk

Credit spreads measure how much extra yield investors demand to hold corporate bonds instead of safe government bonds. Widening spreads mean investors are worried about defaults — a warning sign for stocks too.

Credit spreads (the difference between corporate bond yields and equivalent Treasury yields) indicate market stress. Investment-grade spreads widening beyond 200bps and high-yield spreads beyond 600bps have historically preceded equity market downturns.

Formula

Credit Spread = Corporate Bond Yield - Treasury Yield (same maturity)

Thresholds

IG < 100bps
Tight — credit conditions supportive
IG 100-200bps
Normal
IG 200-400bps
Stressed — risk-off developing
IG > 400bps
Crisis — severe risk-off

Related concepts

  • Yield Curve — Normally, long-term bonds yield more than short-term ones (upward sloping). When short-term yields exceed long-term (inverted curve), it's historically predicted every US recession in the past 50 years. Investors call this the most reliable recession indicator.
  • Treasury Yield — Treasury yields are the interest rates the US government pays to borrow money. They're the foundation of all financial pricing. When 10-year yields rise, it hurts stocks (especially growth stocks) because bonds become a more attractive alternative.
  • Recession Probability — Economists combine yield curve data, unemployment trends, and other indicators to estimate the probability of recession. Above 30% is a warning; above 50% suggests recession is more likely than not.
  • VIX (Volatility Index) — VIX is called the 'fear gauge.' When investors are scared, they buy options to protect themselves, which pushes VIX up. VIX above 30 means real fear in the market. Below 15 means complacency. Extreme fear is often a contrarian buy signal.