Bond Yield Credit Spreads

Key Takeaways

• A credit spread is the difference in yield between two bonds of similar maturity but different credit quality, such as a corporate bond and a Treasury bond.
• It represents the extra compensation investors demand for taking on credit risk (the risk of default).
• Credit spreads typically widen during economic recessions as the perceived risk of corporate defaults increases, and narrow during economic expansions.

Baa Corporate − 10Y US Treasury Yield Spread

A chart displaying the yield spread between Baa corporate bonds and 10-year US Treasury bonds. Key market events are marked with flags.

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Aaa Corporate − 10Y US Treasury Yield Spread

A chart displaying the yield spread between Aaa corporate bonds and 10-year US Treasury bonds. Key market events are marked with flags.

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Baa − Aaa Corporate Bond Yield Spread

A chart displaying the yield spread between Baa and Aaa corporate bonds. Key market events are marked with flags.

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30Y Fixed Mortgage − 10Y US Treasury Yield Spread

A chart displaying the yield spread between 30-year fixed-rate mortgages and 10-year US Treasury bonds. Key market events are marked with flags.

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Interpretation

The charts above display the yield spreads between Corporate Bonds, Treasury Bonds, and Mortgages. All bonds in this comparison have long maturity dates. Therefore, the main differentiator is the underlying credit risk - in contrast to the the duration, which is the differentiator on the Yield Curve page.
Bond yield credit spreads represent the difference in yields between two bonds of similar maturity but differing credit qualities. They serve as a measure of the additional compensation, or spread, investors require for assuming the credit risk associated with a specific bond.
Credit spreads tend to widen in economic recessions and indicate an increased risk of default as well as reduced liquidity in the market. This widening reflects investors' heightened demand for greater compensation in return for assuming the credit risk associated with lower-rated bonds because of concerns about the issuer's ability to meet debt obligations amid challenging economic conditions.

Further Information

• TradingView Chart: Credit Spreads
• Long Chen, David A. Lesmond, and Jason Wei: Corporate Yield Spreads and Bond Liquidity
• Financial Pipeline: What Are Bond Spreads?
• Investopedia: What Is a Yield Spread?
• Investopedia: What Is a Government Bond?
• LongtermTrends: The Real Interest Rate
• LongtermTrends: US Yield Curve

Yields for Corporate Bonds, Treasury Bonds and Mortgages

Yields: Treasury, Corporate Bonds, and Mortgages

A chart comparing the yields of the 10-year US Treasury, Aaa and Baa corporate bonds, and the 30-year fixed-rate mortgage average. US recessions are highlighted.

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Interpretation

The chart above gives a different view of the same data from the spreads above.
The 30-Year Fixed Rate Mortgage Average is the average rate based on mortgages with a 30 year duration in the United States. The data since 1971 is provided by Freddie Mac.
The Baa Corporate Bond Yield series is based on Baa rated bonds with maturities 20 years and above. Baa rated bonds and higher (according to Moody's credit rating) are considered "investment grade".
The Aaa Corporate Bond Yield series is based on Aaa rated bonds with maturities 20 years and above. Aaa is the highest credit rating issued by Moody's.
The 10-Year US Treasury Constant Maturity Rate is the interest that the US Government pays when it issues a Treasury Bond with a duration of 10 years. Debt issued by the US Government is generally considered to be free of credit risk, as the probability of default is almost non-existent. The spreads between Treasury Bonds with different durations are examined on the Yield Curve page.

Data Sources

• Aaa Corporate Bond Yield
• Capital Markets Data: Data from 1857 until 1918
• Federal Reserve Bank of St. Louis: Data from 1919 until 1996
• Federal Reserve Bank of St. Louis: Data since 1997
• Baa Corporate Bond Yield
• Capital Markets Data: Data from 1919 until 1985
• Federal Reserve Bank of St. Louis: Data since 1986
• 30-Year Fixed Rate Mortgage Average in the United States
• Capital Markets Data: 1949 until 1971
• Federal Reserve Bank of St. Louis: Data since 1971
• 10-Year Treasury Constant Maturity Rate
• Stooq: Data since 1871

Frequently Asked Questions (FAQ)

What does it mean when credit spreads 'widen' or 'narrow'? Widening spreads mean the difference between corporate and government bond yields is increasing. This is a sign of a deteriorating economic outlook, as investors demand more compensation for credit risk. Narrowing spreads mean the difference is decreasing, which is a sign of a healthy economy and investor confidence.

What is the difference between Aaa and Baa corporate bonds? Aaa and Baa are credit ratings assigned by Moody's. Aaa is the highest possible rating, given to companies with the lowest risk of default. Baa is a lower, medium-grade investment rating. The spread between Baa and Aaa bonds is a good indicator of how the market is pricing risk within the corporate bond market itself.

Why are Treasury bonds considered 'risk-free'? US Treasury bonds are considered to have virtually no credit risk because they are backed by the full faith and credit of the US government, which can print money to pay its debts. For this reason, the yield on a Treasury bond is often referred to as the "risk-free rate," and all other bonds are priced at a spread above it.

Special thanks to Steven Sabol, creator of Capital Markets Data, for generously providing the data that led to the development of this page.