Yield Spread
Difference between a bond's yield and a benchmark (typically a comparable-maturity Treasury). The simplest and most-cited measure of credit, liquidity, or sector premium over the risk-free rate.
When to use: Use as a quick credit-risk yardstick. A widening spread on otherwise-similar bonds signals deteriorating credit quality, liquidity stress, or sector risk-off — a tightening spread signals the opposite.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| Spread | Yield Spread | Difference between a bond yield and a benchmark yield, in decimal form | % |
| BondYield | Bond Yield | Yield of the corporate or risky bond as a decimal | % |
| TreasuryYield | Treasury Yield | Risk-free benchmark yield as a decimal | % |
Real-Life Examples
Example 1: Investment-Grade Corporate
A 10-year IG corporate bond yields 5.20%; the 10-year Treasury yields 4.00%.
Given
Step-by-Step
A 120 bp spread is typical for solid IG credits. Spreads under 100 bps signal compressed credit risk premia (often a late-cycle warning); spreads above 200-300 bps signal elevated default risk or stress.
Frequently Asked Questions
No — this is the simplest "nominal spread" or "G-spread". Z-spread is the parallel shift to the spot curve that prices the bond exactly; OAS adjusts Z-spread for embedded options. All measure credit/liquidity premium but with increasing sophistication.
For US credits, yes. For some markets and bonds, the swap curve is the more natural benchmark (the resulting figure is called I-spread or LIBOR/SOFR spread). The choice depends on what hedging instrument is most relevant.
In normal conditions IG spreads run 80-180 bps; in crises they can blow out to 400+ bps. High-yield spreads run 300-600 bps normally and can exceed 1,000 bps in distress. Very wide spreads start to imply meaningful default probability, see implied-default-probability for the math.