High-yield bonds are debt obligations that are considered to be riskier investments than investment grade bonds because of the higher probability of default due to the issuer’s lower credit rating. Investing in high-yield bonds comes with a higher degree of risk and potential reward. Some investors also refer to high-yield bonds as “junk bonds” because they offer higher yields but with a much higher risk of default.

The spread measures the difference in interest rate on a high-yield bond compared to a key benchmark such as the yield of a US Treasury bond, or an issue of a highly rated reference bond. Usually, high-yield bond spreads are measured against an index of US Treasury bonds having the same maturity. A high-yield bond spread is equal to the yield on the high-yield bond minus the yield on the Treasury bond. A rising spread means that the yield on the high-yield bond has increased relative to the yield on the Treasury bond.

By tracking high-yield bond spreads, investors can get a sense of how the credit risk of the particular sector or issuer they are considering is being viewed by the markets. A widening spread may warn investors of increasing credit risks that could lead to losses if the bond defaults. Credit spreads are also used as a gauge to measure sentiment in the overall credit markets. A wide spread typically signals a souring economy, as investors become more focused on the available return rather than creditworthiness.

In conclusion, high-yield bond spreads offer investors a way to assess the creditworthiness of an issuer, and overall sentiment in the bond markets. Investors should pay attention to the spread in order to judge the potential risk of default for any bond they are considering for investment. Wide spreads can suggest that a bond may not be as secure as it appears, and should be further examined before purchase. By carefully monitoring the spread, investors can be more informed and aware of the risks associated with any specific high-yield bond.