Credit Spread Risk and Your Portfolio

There are several risks universally associated with investments in fixed-income securities. Some of these risks include default risk, liquidity risk, reinvestment risk and interest rate risk. For United States Treasury securities; however, the market considers these fixed-income securities to be free of default risk.

Investors, therefore, require that bonds issued by entities other than the federal government carry a premium yield-to-maturity so they can be compensated for the added default risk. This premium, called the credit spread, is the extra yield investors require for taking on the added default risk associated with investing in corporate bonds.