Credit Spreads
The extra yield for taking credit risk — and what it says about the cycle.
A credit spread is the extra yield a borrower pays over a risk-free benchmark (usually the matched-maturity treasury) to compensate lenders for default risk and liquidity. Investment-grade, high-yield, and loan spreads all move with the perceived health of the economy.
What spreads tell you
- Widening spreads → the market is pricing more risk (slowing growth, stress, risk-off). Funding gets more expensive for weaker borrowers.
- Tightening spreads → risk appetite, easy financial conditions.
Spreads often move before the real economy turns, which makes them a useful early signal.
Why it matters for a balance sheet
- Your loan pricing should reflect credit spreads, not just the risk-free curve — under-pricing credit in a tightening cycle erodes risk-adjusted return.
- Provisioning and capital: widening spreads often precede higher loss expectations.
- Your own cost of funds (wholesale borrowing, brokered deposits) carries a spread that moves with the market.
How PhxIQ relates
The treasury curve is the risk-free base; credit spreads sit on top. (Tracking specific corporate/loan spread indices is on the roadmap — they require a paid feed.)