When a corporate bond yields 6.5% and a Treasury of similar maturity yields 4.5%, the 200 basis point difference is the credit spread. It is the market's price for bearing the risk that the issuer defaults, plus compensation for lower liquidity and other frictions. Spreads, not absolute yields, are how credit investors talk about value: yields move with interest rates, while spreads isolate the credit component.
The standard measure for bonds is the option-adjusted spread (OAS), which adjusts for embedded options such as an issuer's right to call the bond early. Index-level OAS series — such as the ICE BofA indices for investment grade and high yield, published on FRED — are the most watched barometers of credit conditions. For loans, the analogue is the discount margin; for private credit, the negotiated spread over SOFR.
What is inside a spread? Expected loss (the probability of default multiplied by loss given default) usually explains only part of it. The remainder — often the majority for investment-grade bonds — is a risk premium: compensation for the possibility that losses arrive in bad states of the world, plus liquidity premia and, at times, supply-demand technicals like heavy new issuance or fund flows.
Spread levels map to the rating scale. Investment-grade index spreads have historically ranged roughly from under 100 basis points in strong markets to several hundred in crises; high-yield spreads from around 300 basis points at the tights to over 1,000 in recessions — the informal threshold for "distressed" is a spread of 1,000 basis points or more. These ranges are historical observations, not laws; every cycle rewrites the extremes.
Spreads move for two broad reasons. Credit-specific news — earnings, leverage, downgrades — moves individual issuers. Macro risk appetite moves the whole market: spreads widen when growth expectations fall or volatility rises, and compress when investors reach for yield. Because of this, index spreads function as a real-time gauge of how markets price recession risk, which is why the financial press reports "spreads widened" as shorthand for deteriorating sentiment.
Two mechanical points help when reading market commentary. First, spread duration: a bond's price sensitivity to spread changes scales with its duration, so a 50 basis point widening hurts a 10-year bond far more than a 2-year note. Second, "breakevens": a bond's spread cushions it against widening — the wider the starting spread, the more widening it can absorb before underperforming Treasuries over a holding period.
Common terms: "tights" and "wides" (the narrow and wide ends of a historical range), "decompression" (lower-rated spreads widening faster than higher-rated ones, typical of risk-off phases), "compression" (the reverse), "basis" (the gap between a company's bond spread and its credit default swap premium), and "spread per turn of leverage" (a rough value metric dividing spread by the borrower's debt/EBITDA multiple).