Credit Spread
A credit spread is the yield premium over a risk-free rate that compensates investors for credit risk and liquidity risk.
Definition
Credit spread represents the additional yield investors demand to hold credit instruments instead of risk-free alternatives. Spreads widen when perceived credit risk rises or liquidity deteriorates, and tighten when conditions improve. Spread behavior drives mark-to-market moves in credit portfolios even before defaults occur. Allocator Context Allocators evaluate credit strategies through spread sensitivity, default risk, and recovery assumptions. In private credit, spreads are not always marked daily, but economic exposure still exists—especially during risk-off periods when repricing occurs through lower transaction comps and tighter liquidity. Decision Authority Spread sensitivity influences risk budgets and committee comfort. Strategies with high spread duration can behave like equity risk during stress, triggering sizing limits or governance review. Why It Matters for Fundraising Credit managers should communicate spread sensitivity, underwriting standards, and how the portfolio is positioned across the credit cycle. Allocators want to know what happens when spreads widen—not just the yield in stable markets. Key Takeaways Drives credit portfolio price moves in stress regimes Default risk is not the only risk; repricing matters first Important for portfolio role and sizing decisions Transparency about cycle behavior improves trust