In fixed income, a spread is the difference in yield between two bonds or financial instruments. Spreads are the language of the bond market and convey critical information about risk, economic outlook, and market stress.
Types of Spreads
Why Spreads Matter
Widening credit spreads signal growing risk aversion and potential economic stress. The ICE BofA US High Yield OAS is a key barometer: it averages ~400bp in normal markets, spiked to 1,100bp during COVID (March 2020), and reached 2,100bp+ during the 2008 financial crisis.
Historical Context
IG spreads reached 600bp+ and HY spreads exceeded 2,100bp in December 2008 β the widest levels in modern history. During COVID, HY spreads hit 1,100bp in March 2020 before snapping back to 300bp by early 2021 thanks to Fed intervention.
Trading Implication
A sudden spread widening of 50bp+ in HY over a week is a major risk-off signal. Conversely, tight spreads can indicate complacency. Many credit investors compare current spreads to historical percentiles to assess relative value.