The term "debt spreads widen" refers to a credit spread that is increasing. This concept is mentioned to explain a spread in yield between corporate bonds and government bonds.
The yield of bonds is based largely on the risk factors associated with the bonds. Investors purchasing corporate bonds assume a higher risk than do investors buying government bonds. Corporations can default on repaying their debts; the government does not.
The difference in yields of corporate bonds and government bonds is a credit spread. Corporate bonds always have a higher yield in general than government bonds. When the yield of corporate bonds keeps increasing while government bond yield remains the same, the debt spread widens, or the credit spread increases.
When the credit spread rises, it is a sign that investors are willing to take on increased or greater risks. When the debt spread shrinks, it shows that investors are being more careful about where they put their money.
- Urban Digs: Credit Spreads Widen/ Mini Auctions Failing
- The Sun New York: Credit Spreads Widen Despite Signs of Recovery
- Corporate Finance Institute. "Basis Points (BPS)." Accessed Aug. 21, 2020.
- American Century Investments. "What's the Yield Curve?" Accessed Aug. 21, 2020.
- U.S. Securities and Exchange Commission. "Interest Rate Risk—When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall," Pages 1-3. Accessed Aug. 21, 2020.
Jennifer VanBaren started her professional online writing career in 2010. She taught college-level accounting, math and business classes for five years. Her writing highlights include publishing articles about music, business, gardening and home organization. She holds a Bachelor of Science in accounting and finance from St. Joseph's College in Rensselaer, Ind.