Yield Spread
The difference in yield between two bonds, used to measure relative risk, credit quality, or economic expectations.
What is Yield Spread?
A yield spread is the difference in the yield (interest rate) between two different bonds, typically expressed in basis points (1 basis point = 0.01%). The most common reference is the spread over a benchmark Treasury of the same maturity — a corporate bond yielding 5.5% when the 10-year Treasury yields 4.0% has a 150 basis point spread. Credit spreads measure compensation for default risk: higher-risk (lower-rated) bonds demand wider spreads. Spreads widen during economic stress as investors demand greater compensation for risk, and narrow during strong growth when default risk seems remote. Tracking spread movements — using indexes like the ICE BofA Investment Grade Corporate Index — is a key tool for assessing financial conditions and investor risk appetite.
Example
During the COVID-19 market crisis in March 2020, US investment-grade corporate credit spreads widened from about 100 bps to over 370 bps within weeks as investors fled risk assets. The Federal Reserve's announcement that it would buy corporate bonds for the first time in history caused spreads to narrow sharply. By August 2020, spreads had fully retraced to near pre-crisis levels, demonstrating how central bank intervention can rapidly compress yield spreads.
Source: Federal Reserve Bank of St. Louis — FRED ICE BofA Index