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.