In finance, the yield spread or "credit spread" is the difference between the quoted rates of return on two different investments, usually of different credit quality.
It is a compound of yield and spread.
The "yield spread of X over Y" is simply the percentage return on investment (ROI) from financial instrument X minus the percentage return on investment from financial instrument Y (per annum).
The yield spread is a way of comparing any two financial products. In simple terms, it is an indication of the risk premium for investing in one investment product over another.
When spreads widen between bonds with different quality ratings it implies that the market is factoring more risk of default on lower grade bonds. For example, if a risk-free 10-year Treasury note is currently yielding 5% while junk bonds with the same duration are averaging 7%, the spread between Treasuries and junk bonds is 2%. If that spread widens to 4% (increasing the junk bond yield to 9%), the market is forecasting a greater risk of default which implies a slowing economy. A narrowing of spreads (between bonds of different risk ratings) implies that the market is factoring in less risk (due to an expanding economy).
There are several measures of yield spread, including Z-spread and option-adjusted spread.
Read more about Yield Spread: Yield Spread Analysis, Consumer Loans
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