creditspread

A credit spread is the yield difference between a debt security that carries credit risk and a risk-free benchmark of similar maturity, usually a government bond. It is typically quoted in basis points and reflects the extra compensation investors require for bearing credit risk and reduced liquidity.

In fixed‑income markets, spreads vary with issuer credit quality, time to maturity, liquidity, and market conditions. Spreads tend to widen when credit risk increases, when markets become stressed, or when supply exceeds demand; they narrow when conditions improve and risk appetite returns. They are used in pricing, risk management, and relative-value analysis.

Spreads are measured relative to a benchmark such as government bonds or interest-rate swap curves. Common related concepts include the option-adjusted spread for securities with embedded options, and versus swap (G-spread, Z-spread) in more advanced analysis.

Credit spreads also exist in options trading as a credit spread strategy. An investor sells one option and buys another option on the same underlying with a different strike, collecting net premium at initiation. This creates a defined-risk, limited-profit position; common forms include bull put spreads and bear call spreads.

Limitations: spreads can be affected by liquidity, technical factors, and supply, and may not always reflect fundamental credit risk. They are best used alongside other measures of credit quality and market conditions.