Credit spreads

A spread is the extra yield a lender demands for holding a company's promise rather than the government's. Both halves of that sentence have to be measured on the same day and at the same maturity, and that is where most published spread arithmetic goes wrong.

What a spread actually is

It compensates a lender for three things at once, and they are not separable from the outside. The chance the borrower does not pay. How much is recovered if that happens. And the fact that a corporate bond is harder to sell quickly than a Treasury, which has a price of its own.

Three real numbers, none of them a spread

One company's fiscal 2025 annual report supplies three interest rates, all filed, all correct, all answering different questions.

The subtraction that proves the point

Take the filed 3.25 percent and subtract the 4.69 percent three-year Treasury from 11 September 2026. The answer is minus 1.44 points.

A corporate borrower does not fund below the US Treasury. The negative number is not a finding about credit; it is the result of subtracting a rate fixed years ago from a rate observed on one day in 2026. What it measures is that rates rose after those bonds were issued, which is a fact about the market and not about the borrower.

This is the whole lesson. A book cost of debt tells you what a company pays on what it already borrowed. A spread tells you what the market would charge it now. They are different numbers, they move for different reasons, and they are only equal by accident.

What widens a spread

Three things, roughly in order of speed. Something specific to the borrower: weaker cash flow, a covenant under pressure, a maturity approaching with no plan. Something about the sector. And something about the market's appetite for risk generally, which moves every spread at once and has nothing to do with any individual issuer.

The third is the one that misleads a company-by-company reader, because it makes a borrower look worse without anything at the borrower having changed.

Where this leaves an equity investor

You can compute the book cost of debt from any filing, and it is genuinely useful: it says what the interest bill is now and, set against the maturity table, what happens to it at the next refinancing. This company would refinance 3.25 percent money into a market where the matching Treasury alone yields 4.69, which is a real and dated observation about the direction of its interest cost.

What you cannot do is call that difference a credit spread. If the market yield is not in your data, the spread reads n/a. Missing is a legitimate answer and a guess is not.

Check yourself