Credit Spread
Definition
A credit spread is the extra yield investors demand over a risk-free or floating benchmark to hold credit risk. Bonds are quoted as a spread over Treasuries (e.g., +350 bps); leveraged loans are priced as a margin over SOFR (e.g., SOFR + 400). The spread compensates for expected default losses, downgrade risk, and liquidity.
Spreads widen when perceived risk rises (recession fears, sector stress, weak credit metrics) and tighten in benign markets. Ratings map loosely to spread tiers: investment-grade trades tight; high-yield trades wide, with CCCs widest. Index-level high-yield spreads have historically ranged from roughly 300 bps in hot markets to well over 1,000 bps in crises.
Related measures: yield to maturity versus coupon (OID and price discounts add yield), yield to worst (the lowest yield across call scenarios), and spread duration (price sensitivity to spread moves). For a distressed name, spread becomes less meaningful and investors switch to dollar price and recovery analysis.
Why interviewers ask
Markets-awareness questions ("where are high-yield spreads and what does that tell you?") and mechanics questions ("why did the bond's price fall if Treasuries rallied?") both hinge on spreads. It is baseline vocabulary for any credit, DCM, or leveraged finance seat.
Related terms
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