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...

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?

Recommended

Market crash: have we hit bottom or is there worse to come?
Stockmarkets

Market crash: have we hit bottom or is there worse to come?

For a little while, markets looked like they were about to embark on a full-on crash. And that could still happen, says Dominic Frisby. Today, he look…
27 Jun 2022
How will the crash of 2022 play out?
Investments

How will the crash of 2022 play out?

Stocks, bonds, cryptocurrencies – everything is crashing at the same time. We’ve seen these kinds of multiple collapses before, says Merryn Somerset W…
20 Jun 2022
Everything is collapsing at once – here’s what to do about it
Investment strategy

Everything is collapsing at once – here’s what to do about it

Equity and bond markets are crashing, while inflation destroys the value of cash. Merryn Somerset Webb looks at where investors can turn to protect th…
23 May 2022
The bond-market bloodbath isn’t over yet
Government bonds

The bond-market bloodbath isn’t over yet

The bond-market sell-off isn’t done by along chalk – rising interest-rates could yet push yields higher.
28 Apr 2022

Most Popular

Prepare your portfolio for recession
Investment strategy

Prepare your portfolio for recession

A recession is looking increasingly likely. Add in a bear market and soaring inflation, and things are going to get very complicated for investors, sa…
27 Jun 2022
Market crash: have we hit bottom or is there worse to come?
Stockmarkets

Market crash: have we hit bottom or is there worse to come?

For a little while, markets looked like they were about to embark on a full-on crash. And that could still happen, says Dominic Frisby. Today, he look…
27 Jun 2022
What the end of the 1970s bear market can teach today’s investors
Stockmarkets

What the end of the 1970s bear market can teach today’s investors

The 1970s saw the worst bear market Britain has ever seen, with stocks tumbling 70%. Things have changed a lot since then, says Max King. But there ar…
28 Jun 2022