What Is A Credit Spread?

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What Is A Credit Spread?

If you think of a spread as something to put on your toast, in other words something additional, a credit spread is the extra yield on offer by investing in a higher risk security with the same term to maturity.

A common base case or reference is to ‘zero risk’ Australian Commonwealth Government Bond (ACGBs) yields.

For example, on 16 June 2021, Wesfarmers issued a 10-year fixed rate bond with an issue yield of 2.55%.

Also read: What Is Hot And What’s Not

The ACGBs 10-year rate on that date was 1.656%. The difference known as the spread, between the ACGB and the Wesfarmers bond was 0.894% or 89.4 basis points at first issue.

Credit spreads are a useful way to consider risk and return. Investors need to ask themselves if the spread on offer is enough to compensate for the additional risk.

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Elizabeth Moran
Editorial Director
Elizabeth is a nationally-recognised independent expert on fixed income. She has more than 25 years experience in banking and financial institutions in Australia and the UK and has been published in every major Australian newspaper and investment website. Prior to becoming an independent commentator in 2019 she spent more than 10 years as the head of education and research at fixed income broker FIIG Securities. Prior to joining FIIG, Elizabeth worked as an Editor/Analyst for Rapid Ratings a quantitative credit rating agency. She also spent five years in London, three working as a credit rating analyst for NatWest Markets.

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