More Demands in Credit Spread

There has been a buzz in the market recently about credit spreads. Credit spread is a part of stock options trading. Here the term credit spread would pertain to the difference between the amount of money a trader can expect to receive in regular payments while in a risky bond and the returns paid out on a bond that is considered to be a less risky or saver investment.

In the years before the credit crunch, credit spreads have narrowed hugely. According to the website, StudentseFinancialCareers.com the long term average credit spread between risky bonds and American treasuries is 500 points. By March 2007 the spread between them was about 280 points while on 2008 a year later; the spread had about 800 points in between. This shows that credit spreads have risen since the credit crunch turned nasty.

There are now a lot of investors who want more rewards for holding on to what are deemed to be very risky assets. Before the credit crunch happened, nothing was viewed or deemed as risky that is why investors were happy enough not to be paid higher returns for holding on to these bonds without knowing the fact that the issuers of those bonds may never pay them back.