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Credit Spread

Hi Cullen,

Taken from investopedia, credit spread is the difference in yield between two different bonds that are same in every aspect except the credit rating.

Does it matter/tell us something about the economy if the spread is extremely small/huge ?

A credit spread expresses the difference between two bonds with the same maturities and different credit qualities. The spread can often be expressed to show how risky an investor views a certain set of bonds. For instance, if the 10 year T-note and 10 year junk bond market are yielding the same thing then investors have an extremely high appetite for risk and this could signal an environment where something is inefficient.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Roughly speaking, if the spread is wide enough, does it sign a fairly healthy (efficient) environment ?

In normal times, yes, credit spreads should be somewhat wide. Investors should expect a premium from higher risk assets. But an excessively tight or wide spread usually means something isn’t quite right with the way assets are being priced.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche