Credit spreads, ratings and new issues
By SuperdayReps · Michigan Ross Undergrad | Wharton MBA · ex-Citi | ex-Greenhill · Former Head Mentor at a Leading IB Prep Service
16 min read · updated November 3, 2026
A credit trader's day is spent on one number: how much extra a company has to pay to borrow compared with the government. That number is the credit spread. Clients call to ask why a name widened, salespeople pitch bonds that look cheap against their peers, and the syndicate desk prices new deals off it. If you understand what the spread is made of, you can explain almost any move on a credit screen.
Interviewers for credit desks test this directly. Expect to be asked what a spread is, what widens it, what a downgrade below investment grade does to a bond, and how a new bond gets priced. Strong answers separate the rate part of a bond's yield from the credit part, use one or two numbers, and know who the buyers are, because the buyers explain most of the price action.
A corporate bond's yield is two things added together: a government yield (the rate part) and a spread (the credit part). The spread pays for expected default losses, for illiquidity and for a risk premium, so it moves with company news and with the market's mood, even when the odds of default have not changed. The investment-grade line at BBB- / Baa3 matters more than any other notch, because crossing it changes who is allowed to own the bond.
What a spread is
Take two bonds that both mature in ten years. One is a US Treasury. The other is from a company. Investors will lend to the government at a lower yield, because the government is not expected to default and its bonds trade in huge size every second. The company has to pay more.
The difference is quoted in basis points (bp). One basis point is 0.01%, so 100 bp is 1%. Say the ten-year Treasury yields 4.30% and the company's ten-year bond yields 6.10%. The spread is 1.80%, which the desk calls 180 bp, or "plus 180."
Traders think in spread, not yield, for a practical reason. The Treasury part moves for reasons that have nothing to do with the company: inflation data, the Fed, the supply of government debt. A credit trader wants to know whether the market likes this company more or less than yesterday, and the spread isolates that.
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Frequently asked
- What is a credit spread?
- The extra yield a corporate bond pays over a risk-free government bond of the same maturity, usually quoted in basis points. It pays investors for the expected loss from default, for the bond being harder to sell than a Treasury, and for bearing a risk that tends to hit in bad times. It widens when investors worry more about being repaid and tightens when they worry less.
- What makes credit spreads widen?
- Company news, like rising leverage, an earnings miss, a debt-funded acquisition or a downgrade. And market-wide fear, like a recession scare, falling stocks or money flowing out of credit funds. A spread can widen sharply with no change in any company's default odds, because the liquidity and risk premium parts of the spread move too.
- What is a fallen angel bond?
- A bond cut from investment grade (BBB- or Baa3 and above) to high yield. That single notch matters more than any other because many insurers, pension funds and index funds may only hold investment grade, so they are forced to sell at the same time. The selling often pushes the price below what the credit is worth, and high-yield buyers step in.
- What is a new issue concession?
- The small extra spread a company pays on a new bond over where its existing bonds already trade. It is a sweetener that gets investors to put in orders for a large amount of bonds on one day. If the new bond trades tighter right after pricing, the concession did its job.
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