Credit Spread Is Compensation
Interpret a credit spread as compensation for default, downgrade, liquidity, and event risk.
A spread is a risk price. Start with the reference yield Treasury yield is often treated as the base rate for U.S. dollar bonds. A corporate, municipal, or securitized bond adds a spread because its repayment story is different. Name the risk inside the spread Default, downgrade, liquidity, call, event, and structural risks can all sit inside the extra yield. Ratings help, but they are a starting point, not a full decision. Ask if the spread pays enough The right question is not only "is the yield higher?" It is "is the added yield enough for the risk, time horizon,…
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