Credit Spread
The yield difference between a corporate (or other non-government) bond and a Treasury of the same maturity — the market's price for credit risk.
Credit Spread = Corporate Bond Yield − Treasury Yield (same maturity)
A credit spread is the additional yield an investor demands above the risk-free Treasury rate to compensate for the possibility of default. A BBB corporate bond yielding 5.50% when the 10-year Treasury yields 4.50% has a 100 basis point (1%) credit spread.
Credit spreads are a real-time barometer of risk appetite. Tightening spreads (spreads narrowing) signal confidence and risk-on conditions — investors are comfortable taking credit risk. Widening spreads signal fear, deteriorating fundamentals, or flight to safety.
The high-yield spread index (ICE BofA HY Index) is particularly watched as an early warning indicator for equity markets. A sharp spike in HY spreads often precedes equity selling and tightening credit conditions across the economy.