Credit Spread
A credit spread is the yield difference between a credit instrument and a comparable risk-free benchmark, reflecting compensation for risk.
Allocator relevance: A core pricing and risk signal used to assess default probability, liquidity conditions, and market stress.
Expanded Definition
Credit spreads widen when perceived risk rises and tighten when confidence increases. Spreads reflect not only default risk, but also liquidity, technical market conditions, and investor sentiment. In private credit, spreads are often negotiated, so comparisons require adjusting for structure, covenants, and collateral.
Spread movement can drive mark-to-market volatility in NAV-based strategies and can also influence refinancing risk for borrowers.
How It Works in Practice
Investors monitor spreads by rating, sector, and structure to assess relative value and risk-on/risk-off regime shifts. In underwriting, spread is interpreted alongside leverage, covenant package, and borrower fundamentals.
Decision Authority and Governance
Risk governance often includes spread shock scenarios and limits on exposure to spread-sensitive strategies. Investment committees should ensure underwriting standards do not drift purely to chase spread.
Common Misconceptions
- Wider spreads always mean “better deals.”
- Spreads measure only default risk.
- Private spreads are directly comparable to public spreads without adjustment.
Key Takeaways
- Spreads reflect risk + liquidity + regime conditions.
- Structure and covenants matter as much as spread level.
- Spread volatility can impact marks and refinancing outcomes.