What Is a High-Yield Bond Spread?

A high-yield bond spread is the percentage difference in current yields of various classes of high-yield bonds compared against investment-grade corporate bonds, Treasury bonds, or another benchmark bond measure. Spreads are often expressed as a difference in percentage points or basis points. The high-yield bond spread is🌠 also referredඣ to as credit spread.

How a High-Yield Bond Spread Works

A high-yield bond, also known as a junk bond, is a type of bond that offers a high rate of interest because of its high 澳洲幸运5官方开奖结果体彩网:risk of default. A high-yield bond has a lower credit rating than government bonds or investment-grade corporate bonds, but the higher interest income or yield draws investors to it. The high-yield sector has a low correlation to other fixed income sectors and has less 澳洲幸运5官方开奖结果体彩网:sensitivity to interest rate, making it a good investment asse𓂃t for portfolio diversification.

The greater the default risk of a junk bond, the higher the interest rate will be. One measure that investors use to assess the level of risk inherent in a high-yield bond is the high-yield bond spread. The high-yield bond spre🅷ad is the difference between the yield for low-grade bonds and the yield for stable high-grade bonds or government bonds of similar maturity.

As the spread increases, the perceived risk of investing in a junk bond also increases, and hence, the potential for earning a higher return on these bonds increases. The higher yield bond spread is, therefore, a 澳洲幸运5官方开奖结果体彩网:risk premium. Investors will take on the higher risk 𒉰prevalent in these bonds in return for a premium or higher earnings✅.

High-yield bonds are typically evaluated on the difference between their yield and the yield on the U.S. 澳洲幸运5官方开奖结果体彩网:Treasury bond. A company with weak financial health will have a relatively high spread relative to the Treasury bond. This is in contrast to a financially sound company, 🧸which will have a low spread relative to the US Treasury bond. If Treasuries are yielding 2.5% and low-grade bonds are yielding 6.5%,🅺 the credit spread is 4%. Since spreads are expressed as basis points, the spread, in this case, is 400 basis points.

Benefits of High-Yield Bond Spreads 

High-yield spreads are used by investors and market analysts to evaluate the overall credit markets. The change in the perceived credit risk of a company results in 澳洲幸运5官方开奖结果体彩网:credit spread risk. For example, if lower oi𒊎l prices in t🍬he economy negatively affect a wide range of companies, the high-yield spread or credit spread will be expected to widen, with yields rising and prices falling.

If the general market’s 澳洲幸运5官方开奖结果体彩网:risk tolerance is low and investors navigate towards sta🦩ble investments, the spread will increase. Higher spreads indicate a higher default risk in junk bonds and can be a reflection of the overall corporate economy (and therefore credit quality) and/or a broader weakening of macroeconomic conditions.

The high-yield bond spread is most useful in a historical context, as investors want to know how wide the spread is today compared to the average spreads in the past. If the spread is too narrow today, many savvy investors will avoid buying into junk bonds. High-yield investments a💛re attractive vehicles for investors if💃 the spread is wider than the historical average.