Credit spreads are the difference between the performance of corporate-issued debt and the spot Treasury curve. Analysts look at these spreads to gain insight into the return investors get for owning riskier securities, as opposed to risk-free Treasury bonds. However, different segments of the corporate credit sector have different means and variance, which makes it difficult to compare the evolution of credit spreads over time and understand if financial conditions are tight or loose.
The FRED graph above allows us to compare spreads across different investment grade categories: The blue, red, green, purple, and teal lines are credit spreads from the whole US corporate, BBB, single-A, AA, and AAA indices, respectively.
The graph displays the z-scores of credit spreads from the end of 1996 to the present. These z-scores are the position of a raw variable in terms of its distance from the mean, measured in standard deviation units. Values below zero indicate a negative distance from a mean credit spread, indicating relatively small spreads. On the other hand, values above zero indicate relatively large spreads. Not surprisingly, there are spikes across all investment categories during recession periods (shaded in gray). These spikes indicate the relatively high risk of purchasing corporate debt at these points in time compared with the entire period.
Since the pandemic, credit spreads have narrowed, with indices below zero indicating levels beneath the historical average. Further, credit spreads are currently about half a standard deviation below the historical mean across all investment-grade categories. This suggests that financial conditions are loose.
How this graph was created: Search FRED for and select the following series IDs. For each new credit spread, click the “Edit Graph” then the “Add Line” option.
- BAMLC0A4CBBB
- BAMLC0A0CM
- BAMLC0A3CA
- BAMLC0A2CAA
- BAMLC0A1CAAA
Download the data and calculate the mean and standard deviation of each credit spread using your favorite tool. Go back to the graph in FRED and edit the formula for each line. Change each formula from a to (a-u/s) where u and s are the mean and standard deviations for a given credit spread, respectively.
Suggested by Anna Cole and Julian Kozlowski.
