What do widening credit spreads indicate?

The widening is reflective of investor concern. This is why credit spreads are often a good barometer of economic health – widening (bad) and narrowing (good).

What does it mean when high yield spreads widen?

The direction of the spread may increase or widen, meaning the yield difference between the two bonds is increasing, and one sector is performing better than another. Widening spreads typically lead to a positive yield curve, indicating stable economic conditions in the future.

What does a credit spread widening mean about bond market sentiment?

The credit spread is the difference in yield between bonds of a similar maturity but with different credit quality. For example, if the market becomes more skeptical about the creditworthiness of an issuing company, the spread of that company’s bonds widens (its yield relative to the benchmark widens). …

Can you do credit spreads on Robinhood?

In the case of a call credit spread, you would simultaneously buy-to-close the short call option (the one you initially sold to open) and sell-to-close the long call option (the one you initially bought to open). In general, you can close a spread up until 4:00 pm ET on its expiration date on Robinhood.

What does spread tightening indicate?

Bond spreads tighten with improving economic conditions and widen with deteriorating economic conditions. In terms of business cycles, widening spreads indicate a slowing economy. Since companies are more likely to default in a slowing economy, the credit risk related to their bonds rises.

What does a negative bond spread mean?

A negative bond yield is when an investor receives less money at the bond’s maturity than the original purchase price for the bond. Even when factoring in the coupon rate or interest rate paid by the bond, a negative-yielding bond means the investor lost money at maturity.

Do you let a credit spread expire?

Spread is completely in-the-money (ITM) Spreads that expire in-the-money (ITM) will automatically exercise. Generally, options are auto-exercised/assigned if the option is ITM by $0.01 or more. If you are interested in avoiding exercise/assignment fees, you may want to close out of your ITM spreads before expiration.

Do you need collateral for put credit spread?

The collateral, aka margin requirement for vertical spread, is the difference in strikes less the premium received. If a credit spread expires worthless, you keep the net premium received for the spread (not the collateral). The proceeds of the spread are yours if it expires worthless.

Why are spreads tightening?

Investment-grade spreads have tightened to pre-COVID levels, driven largely by progress on the development of COVID vaccines, support from ongoing fiscal and monetary stimulus, and resolution of the political drama of the contentious presidential election.

What happens to credit spreads during a recession?

In terms of business cycles, a slowing economy tends to widen credit spreads as companies are more likely to default, and an economy emerging from a recession tends to narrow the spread, as companies are theoretically less likely to default in a growing economy.

How are CDS spreads and the impact of spread widening?

CDS Spreads and the Impact of Spread Widening. The credit spreads represent the pure credit risk and are linked with the credit ratings issued by the ratings agencies. When an entity is downgraded, it results in a CDS spread widening, because the perceived credit risk of the entity has increased.

Why is a widening credit spread a good thing?

This dynamic causes US treasury prices to rise and yields to fall while corporate bond prices fall and yields rise. The widening is reflective of investor concern. This is why credit spreads are often a good barometer of economic health – widening (bad) and narrowing (good).

How is the credit spread related to yield?

Since yield reflects the risk of a bond, the credit spread reflects the difference in the risk of two bonds with otherwise similar characteristics. Usually, one of the bonds is issued by the U.S. Treasury, and so is considered to have no credit risk.

How does a credit spread option strategy work?

When you establish a bullish position using a credit put spread, the premium you pay for the option purchased is lower than the premium you receive from the option sold. As a result, you still generate income when the position is established, but less than you would with an uncovered position. Let’s look at an example.