Advertisement

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.

Advertisement - Article continues below

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?

Advertisement
Advertisement

Recommended

Visit/glossary/bonds
Glossary

Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020
Visit/spending-it/glossary/601300/quantitative-investing
Glossary

Quantitative investing

Quantitative investing uses sophisticated computer-based mathematical models to identify and carry out trades.
8 May 2020
Visit/glossary/quantitative-easing-qe
Glossary

Quantitative easing (QE)

Quantitative easing (QE) involves electronically expanding a central bank's balance sheet.
8 May 2020
Visit/glossary/600702/emerging-markets
Glossary

Emerging markets

An emerging market is an economy that is becoming wealthier and more advanced, but is not yet classed as "developed".
24 Jan 2020

Most Popular

Visit/investments/stockmarkets/601423/as-full-lockdown-ends-what-are-the-risks-for-investors
Stockmarkets

As full lockdown ends, what are the risks for investors?

In the UK and elsewhere, people are gradually being let off the leash as the lockdown begins to end. John Stepek looks at what risks remain for invest…
29 May 2020
Visit/economy/global-economy/601420/james-ferguson-the-virus-the-lockdown-and-what-comes-next
Global Economy

The MoneyWeek Podcast: James Ferguson on the virus, the lockdown, and what comes next

Merryn talks to MoneyWeek regular James Ferguson of Macrostrategy Partnership about what's happened so far with the virus; whether the lockdown was th…
28 May 2020
Visit/investments/property/601411/can-the-uk-housing-market-escape-a-slump
Property

Can the UK housing market escape a slump?

The Bank of England is predicting a 16% slump in house prices.
29 May 2020