What is a credit spread?
Credit spreads are an important concept in both bond investing and options trading. In the bond market, they can show how risky different bonds are and provide insights into the health of the economy. This article details what credit spreads are, how they work, and their importance. We will first discuss credit spreads in the context of bonds, and then briefly address their concept in options trading.
What are credit spreads?
A credit spread is the difference in yields between two loans or bonds that are repaid at the same time, but differ in their credit ratings (risk levels).
In bond trading, this concept is associated with comparing two bonds maturing at the same time, one from a safer borrower and the other from a riskier borrower (such as debt issued by emerging markets or companies with lower credit ratings).
The credit spread shows the amount of additional yield that the riskier bond offers to compensate for the extra risk. Unsurprisingly, this spread affects how much profit you make from your investment.
How credit spreads work
Investors often compare the yield of corporate bonds to the yield of government bonds, such as U.S. Treasury bonds, which are considered low-risk. For example, if the yield on a 10-year U.S. Treasury bond is 3% and the yield on a 10-year corporate bond is 5%, the credit spread is 2% or 200 basis points.
Many investors use credit spreads to understand how risky a single company's bonds are, as well as the overall strength of the economy. When credit spreads are wide, they often indicate economic difficulties. When they are narrow, they indicate confidence in the economy.
#BinanceAlphaAlert #MarketRebound #SaylorBTCPurchase #NEWTBinanceHODLer