Credit Spreads
Investment grade vs. high yield, default rates by rating, and spreads as a market signal
In March 2020, the average yield on U.S. high-yield (junk) bonds spiked from about 5.
5% to over 11% in three weeks. Treasury yields were falling. The difference between the two — the credit spread — exploded from roughly 350 basis points to over 1,000 basis points.
Investors were pricing in a wave of corporate defaults. Then the Fed announced unprecedented corporate bond purchases on March 23, 2020. Spreads collapsed back to 500 basis points within weeks.
Investors who bought high-yield bonds during the panic earned 20%+ returns in the following 12 months. Credit spreads are both a measure of fear and a measure of opportunity — and learning to read them is one of the most valuable skills in macro-aware investing. A credit spread is the extra yield a corporate bond pays over a Treasury bond of the same maturity.
That is the opening. Finishing a lesson is where it stops being interesting and starts being useful: the full lesson runs to 7 sections and ends with 5 practice questions. A free account is what opens the rest, and the other 255 lessons in the Academy with it. No card.
What this lesson covers
- 1What credit spreads measure
- 2Credit ratings and historical default rates
- 3Spread compression and widening as a market signal
- 4Credit spread cycle: BBB OAS over Treasuries (historical range)
- 5Fallen angels and rising stars — the BBB/BB boundary
- 6Reading the spread signal: March 2020 in real time
- 7Where to see this on the platform