Savvy investors know that credit spreads may be one of the best indicators of the broader economy’s health, not just the creditworthiness of this or that company. In bond trading, the difference between the yields of two bonds with the same maturity but different credit quality is known as the credit spread, and it can have a significant effect on your investment returns.
Credit spreads are measured in basis points, which are equal to 0.01%. For example, a 1% difference in yield is equal to a spread of 100 basis points. Also known as bond, yield, or default spreads, they allow you to quickly compare the yields of corporate bonds to risk-free alternatives, such as Treasury notes. For instance, if a 10-year Treasury note yields 5% and a 10-year corporate bond yields 7%, the credit spread between the two bonds is 200 basis points. Analysts also aggregate all corporate bonds of a particular type, subtract out the Treasury rates,…
