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Credit curve

The term structure of an issuer's credit spreads across maturities; normally upward sloping, and its inversion is a warning that near-term default risk is rising.

For a healthy issuer, longer maturities carry wider spreads because there is more time for things to go wrong. The slope is the credit market's version of the yield-curve and it steepens when investors are comfortable and flattens when they are not.

An inverted credit curve, where short-dated bonds trade wider than long-dated ones, means the market sees a near-term liquidity or refinancing event. At that point the short bonds are the risky ones, because survival past the next maturity wall is the binary question.

Example: an issuer's 2-year trades at 240 basis points and its 10-year at 310, a normal 70 basis point slope. After a covenant breach the 2-year widens to 900 while the 10-year goes to 700, an inversion signalling imminent refinancing risk.

Related: credit-spread-bonds, yield-curve, distressed-debt, default, credit-cycle

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Bid-ask spread in an order bookSell orders stacked above buy orders with a gap between the best of each.SELLERS (asks)50.0690050.051,40050.0460050.011,10050.002,30049.99800spread = 0.03BUYERS (bids)
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.

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