SignalFrogA credit spread is the yield premium a company must pay over the government to borrow money. It is the price the market demands for default risk — and therefore a very direct measurement of distrust.
Why they react early
Bondholders and shareholders look at the same company from different positions. The shareholder profits when things go well and can lose no more than the stake. The bondholder never gains more than the coupon but loses everything if the company defaults.
This asymmetry makes bond markets more cautious. They often react to a deterioration in creditworthiness before equity prices reflect it — not because their participants are smarter, but because they ask a different question: not "how much could this become" but "will my money come back".
What a widening indicates
When the premium rises, the market demands more compensation for the same risk. That can have two causes, and the distinction matters: either borrowers have genuinely deteriorated — or buyers' appetite for risk has fallen while nothing about the companies has changed.
How to read them
The premium of high-yield bonds over government bonds is the common benchmark. Pace is what matters: a slow widening over months belongs to the cycle, a jump within days is a stress signal — and it rarely comes alone.