Explain what drives the credit spread term structure, and read what a given credit spread curve across maturities shows
The idea
The term structure of credit spreads plots spreads by maturity for one issuer or rating. For highly rated issuers it usually slopes upward: default in the near term is unlikely, but uncertainty grows with time and quality has more room to fall than to rise. For distressed issuers it is often inverted, because near-term default risk is high and, if the company survives, its risk falls. Its shape also reflects the macro outlook, the market's liquidity at different maturities, and supply of bonds. Spreads should be measured from zero-coupon curves for both the issuer and the benchmark. Do not read an inverted curve as a sign of improving credit today.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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