Credit spread

When governments borrow – by selling ‘gilts’ in the UK and ‘treasuries’ in the US – they offer the buyer a low annual return or ‘yield’, as the risk of default is virtually non-existent. Companies that borrow by issuing bonds, on the other hand, have to offer a higher yield to attract investors who are worried about the higher risk of non-repayment and the potential loss of their investment.

The gap between the higher return offered by a corporate bond and the ‘risk free’ return on a safer government bond is known as a ‘spread’. The riskier the company, the bigger – or ‘wider’ – this credit spread will be. So if the yield on gilts is 5.5% and a safe AAA rated firm offers a yield of 5.7%, the spread of 0.2% is said to be ‘narrow’ – or small. Conversely, a firm with a lower credit rating and a higher risk of default might have to offer a return of, say, 6.5% with a correspondingly wider spread of 1% over safer gilts.

• Watch Tim Bennett’s video tutorial: What are credit spreads?

66% off newsstand price

12 issues (and much more) for just £12

That’s right. We’ll give you 12 issues of MoneyWeek magazine, complete access to our exclusive web articles, our latest wealth building reports and videos as well as our subscriber-only email… for just £12.

That’s just £1 per week for Britain’s best-selling financial magazine.

Click here to take advantage of our offer

Britain is leaving the European Union. Donald Trump is reducing America’s role in global markets. Both will have profound consequences for you as an investor.

MoneyWeek analyses the critical issues facing British investors on a weekly basis. And, unlike other publications, we provide you with the solutions to help you turn a situation to your financial advantage.

Take up our offer today, and we’ll send you three of our most important investment reports:

All three of these reports are yours when you take up our 12 issues for £12 offer today.

MoneyWeek has been advising private British investors on what to do with their money since 2000. Our calls over that period have enabled our readers to both make and save a great deal of money – hence our position as the UK’s most-trusted investment publication.

Click here to subscribe for just £12