Spread & Basis
How much higher a bond's yield is versus the risk-free benchmark. This spread encapsulates the market's credit and liquidity assessment of the issuer.
What Is a Spread?
A bond spread is the difference between a bond's yield and the risk-free benchmark rate for the same maturity. For example, if a Samsung Electronics 5-year bond yields 5.00% and the same-maturity Korean government bond yields 3.50%, the spread is 150bps (basis points = 1.5%).
This spread is the sum of two risk premiums: (1) Credit risk — the risk that the issuer cannot repay principal and interest. Lower-rated issuers pay wider spreads. (2) Liquidity risk — whether the bond can be sold in the market at any time. Smaller or newer issuers carry a liquidity premium.
The overall level of credit spreads is one of the most sensitive gauges of the economic cycle. Spreads widen sharply during crises and tighten during stable periods.
Basis — Choosing the Benchmark
To calculate a spread, a benchmark ("basis") is needed first. Three main bases are used in markets:
(1) Government bond spread — spread over U.S. Treasuries (UST), German Bunds, or Korean government bonds (KTB). Quoted as "T+150bps." Most common for sovereign and SSA issuance. (2) SOFR/LIBOR spread — interbank rate basis. Common for financial institution issuance. LIBOR was replaced by SOFR in 2023. (3) Swap spread (ASW: Asset Swap Spread) — spread over the interest rate swap curve. Widely used in relative value analysis.
Which basis to use depends on investor type and issuance currency. USD IG bonds are typically quoted vs. UST.
Key Terms
A unit of 0.01% in interest rates. 100bps = 1%. The standard unit for expressing bond spreads and rate changes.
Spread widening signals increasing credit risk or deteriorating liquidity. Tightening signals improving market stability.
Where This Concept Appears
Learning Paths
Related Concepts
The DCM Ecosystem Map
The global bond market is worth over $130 trillion — larger than equities. Yet many of the biggest buyers aren't here for yield. Understanding DCM starts with this paradox: a complete map of the issuer–investor–investment bank triangle.
OAS (Option-Adjusted Spread)
The pure credit spread of a bond after stripping out embedded option value (calls, puts, etc.). An essential tool for comparing complex structured bonds like AT1s and callables.
NIC (New Issue Concession)
The extra premium a new bond must offer above existing secondary-market bonds to attract investors. A key negotiation variable between issuers and banks, and a barometer of market conditions.
Investment Grade
BBB- (S&P) / Baa3 (Moody's) and above. Because most institutional investors are mandated to hold only IG bonds, the IG/HY divide carries implications far beyond a simple ratings boundary.
High Yield
Sub-investment-grade bonds rated BB+ and below. How the 'junk bond' market transformed leveraged buyouts and the entire corporate M&A ecosystem in the 1980s and beyond.