Credit Spread

Because U.S. Treasury bonds are considered free of default risk, they serve as a baseline. Any bond issued by a corporation, municipality, or other entity carries some possibility of default, so buyers demand a higher yield. That extra yield — expressed in percentage points or, more commonly, in basis points, where one basis point equals one one-hundredth of a percentage point — is the credit spread. A wider spread signals greater perceived risk; a narrower spread signals greater confidence in the issuer.

Credit spreads fluctuate with market conditions. In periods of economic stress, spreads tend to widen sharply as investors grow cautious; in calm, optimistic periods, they compress. For families holding investment-grade or high-yield corporate bonds, spread movements affect the market value of those holdings independently of changes in the underlying yield curve. A bond can lose value simply because the market's appetite for credit risk has declined, even if interest rates are unchanged.

A hypothetical example: imagine a family office holding bonds from a hypothetical manufacturing company that were purchased when spreads were narrow. If economic conditions deteriorate and credit spreads widen, those bonds will fall in price — even if the company itself has not missed a payment. This spread-driven price movement is a distinct risk from interest-rate risk and is worth evaluating separately when reviewing a fixed-income allocation. See our broader fixed income overview for context.