Money & Finance › Bonds, rates & Treasuries › Bonds: lending money in exchange for interest
Corporate bonds and credit spreads
· Asset or instrument
Fact, law or dataA rule, statute, definition or measured number.
Corporate bonds are company IOUs; their yield is the Treasury yield plus a credit spread that pays for the risk of default.
See it on the Money & Finance map →How it works
Investment-grade bonds, rated BBB- or higher, come from sturdier companies; lower-rated high-yield or junk bonds pay more. Spreads over Treasuries widen when investors fear defaults: investment-grade spreads near 1 point in calm times reached about 6 in late 2008, and high-yield spreads roughly 20. In 2020 the Fed bought corporate bonds and bond ETFs for the first time. The US market exceeds $10 trillion. Individuals usually get exposure through corporate bond funds or ETFs.
Why it matters
Credit spreads are a real-time fear gauge for business credit, and companies' borrowing costs shape hiring, investment and buyouts.
Think of it like
Like the cap-rate gap between a Class A and a Class C building: the riskier income stream must pay more.
Facts, rules and data
Rating agencies' default studies; ICE BofA spread indexes on FRED; SIFMA market-size data; the Fed's reports on its 2020 corporate credit facilities.
Debates and risks
Whether spreads near record lows in 2025 fairly priced default risk, especially in the large BBB tier just above junk, is debated.
Inside this (1)
Connections (4)
▸Corporate bonds and credit spreads are graded by Credit rating agencies: Moody's, S&P and FitchFact, law or data
The connection
Companies pay the agencies to rate their bonds before selling them. The grade decides who can buy, since many pensions, insurers and funds may hold only investment grade, and sets the spread over Treasuries the company pays. Only two US companies, Microsoft and Johnson & Johnson, hold S&P's top AAA rating.
When and why
Moody's began with railroad bonds in 1909; today the big three rate thousands of companies worldwide, paid by the issuers.
How we know
Agency default studies show default rates rise steadily as ratings fall; ICE BofA spread data by rating, on FRED, show the price effect.
Debates and risks
Whether issuer-pays inflates grades, and why ratings lag markets: Enron was rated investment grade until four days before its 2001 bankruptcy.
▸Corporate bonds and credit spreads get repaid in bankruptcy before Stocks: owning a slice of a companyFact, law or data
The connection
Bondholders are creditors with a legal claim to fixed payments; shareholders are owners who get what is left. In bankruptcy the 'absolute priority rule' pays secured debt, then unsecured bonds, then preferred stock, then common stock, which is often wiped out. So bonds are safer but capped; stocks carry the upside.
When and why
US bankruptcy law, especially Chapter 11 of the 1978 Bankruptcy Code, building on Supreme Court rulings such as Northern Pacific Railway v. Boyd (1913).
How we know
Court records and Moody's recovery studies: senior unsecured bonds recover roughly 40 cents on the dollar on average, while shareholders usually get nothing.
Debates and risks
Negotiated deals often bend the priority rule; in Hertz's 2020–21 bankruptcy shareholders unusually came out with value.
▸Insurance companies: pooling risk and investing premiums are among the biggest holders of Corporate bonds and credit spreadsFact, law or data
The connection
Life insurers owe steady payments for decades, so they buy long investment-grade corporate bonds that pay more than Treasuries on a predictable schedule. State capital rules charge more for lower ratings, so insurers cluster in the A and BBB grades. They also buy private placements, bonds sold directly to them rather than to the public.
When and why
A practice dating to 19th-century railroad bonds; today US life insurers hold trillions of dollars of corporate bonds, per Fed data.
How we know
The Fed's Financial Accounts (Z.1) list bond holdings by type of investor; the NAIC publishes insurers' portfolios and rating mix.
Debates and risks
Regulators debate whether insurers' drift toward BBB and privately rated bonds, often graded by smaller agencies, understates their risk.
▸Credit-tenant-lease (CTL) financing: lending on the tenant's credit trades much like Corporate bonds and credit spreadsMainstream view
The connection
A CTL loan is, in effect, the tenant's long-term debt: rent pays it off on a fixed schedule, much as a company pays bond coupons. Investors price it as a spread over Treasuries, close to the tenant's corporate bonds plus a small premium for the real estate structure and lower liquidity.
When and why
In private-placement markets, where insurers buy both corporate bonds and CTL loans.
How solid is the link?
Investors' reported pricing and NAIC treatment of CTLs alongside bonds; rating agencies use similar methods for both.
Debates and risks
How much extra yield CTLs should pay for illiquidity and building risk, compared with the tenant's public bonds, varies by deal.