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Credit Spread

What does Credit Spread mean?

A credit spread is the difference in yield between treasuries and corporate bonds of same maturity. The difference is because of different credit quality of the two instruments. Treasuries are considered very safe because they are backed by the US Government. They command a premium and trade at lower yields. The corporate bonds carry higher yields depending on their creditworthiness.

Futures Knowledge Explains Credit Spread

Higher credit spread indicates growing concern on the ability of corporate borrowers to service their debt. The credit spread also depend on prevailing economic outlook. For example, in June 2015 the yield for ten-year Treasuries is at 2.3%, whereas yield on A-rated corporate bonds is trading at 3.5%. This means the spread is around 120 basis points (1.2%), compared to above 1800 basis points during the 2008 financial crisis.

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