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?
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
-
8 of the best houses for sale for around £500,000
Some of the best houses for sale for around £500,000 – from a 19th-century stone farm cottage in North Yorkshire and a two-bedroom apartment in Edinburgh’s New Town to a converted Methodist chapel in Norfolk
-
What will the unravelling of US-China trade mean for the economy?
What will a US-China decoupling mean for the global economy?