Credit spread = bond's yield to maturity - yield of a same-maturity government bond; multiply by 100 for basis points
What it is
A credit spread is the extra yield a bond carrying default risk pays over a government bond of the same maturity. The government bond serves as the benchmark because a sovereign borrowing in its own currency is treated as the closest thing to risk-free. Spreads are quoted in basis points, where one basis point is one hundredth of a percentage point: if a company's bond yields two percentage points more than the matching government bond, its credit spread is 200 basis points. That gap is what lenders demand for two things above all - the chance the borrower defaults or pays late, and the difficulty of selling the bond quickly at a fair price.
Why it matters
The spread is the bond market's continuously updated opinion of how risky a borrower is, rather than a rating agency's periodic letter grade. A widening spread means buyers are demanding more compensation to hold that debt; a narrowing spread means they are demanding less. Because bond prices and yields move inversely, a spread that widens while government yields sit still implies the bond's price has fallen. Aggregate spreads across many issuers are watched as a gauge of credit conditions and risk appetite. None of this forecasts anything - it describes what buyers and sellers are pricing right now.
How it's calculated
Take the yield to maturity of the risky bond and subtract the yield of a government benchmark bond of similar maturity; the remainder is the credit spread, expressed in basis points. Because an exact-maturity government bond rarely exists, desks interpolate between the two nearest benchmarks, or measure against a swap curve instead. Refined versions adjust for structure: a Z-spread is the constant amount added across the whole government spot curve that makes the bond's discounted cash flows equal its market price, and an option-adjusted spread (OAS) further strips out the value of embedded features such as a call provision. Index providers publish aggregate spreads by rating and sector.
Cross-border note. The benchmark differs by market: US corporate spreads are quoted against US Treasuries, Canadian ones against Government of Canada bonds, so spreads are not directly comparable across the border without allowing for two different curves. Canada's corporate bond market is also much smaller than the US market, and Morningstar DBRS, founded in Toronto, is widely used in Canadian credit alongside S&P and Moody's.
FAQ
Is a wider credit spread better?
A spread is a price, not a verdict. A wider spread means the market judges the borrower riskier and demands more yield for holding its debt - the extra yield exists precisely because the odds of being repaid in full and on time are seen as lower. It describes how the bond is priced, not whether it is suitable for anyone.
Does 'credit spread' mean the same thing in options?
No - the same words describe two unrelated things. In fixed income it is a yield difference between two bonds. In options, a credit spread is a two-leg position where a trader sells one option and buys another on the same underlying and receives a net premium up front. That premium is not risk-free income: the maximum loss is the gap between the two strikes minus the premium received, larger than the premium itself. Which meaning applies depends on the market discussed.
What makes a spread widen or narrow?
Anything that changes the market's view of repayment odds or its appetite for risk: results or downgrades at the issuer, the supply of new bonds, and broad swings in sentiment. Spreads also move when the government benchmark yield moves, because a spread is a difference between two yields - a corporate bond's own yield can fall while its spread widens.