credit spreads rallied

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09:39 Jul 11, 2018
English to English translations [PRO]
Bus/Financial - Finance (general)
English term or phrase: credit spreads rallied
"The volatility of the previous reporting period dissipated over the past month and ***credit spreads rallied*** across all asset classes. Cash spreads and CDS indices moved tighter across the board with higher beta sectors demonstrating the most significant recovery. It now appears the market has recognised most of factors behind the sharp market correction last month were unlikely to cause serious or widespread economic problems."

How would you define the meaning of "credit spreads rallied" in English? I'm not interested in its translation.

Thank you!!
Anisa


Summary of answers provided
4 +1the difference between the yield of government bonds and less secure corporate bonds decreased
Charles Davis
4 +1lending margins increased
philgoddard


  

Answers


3 hrs   confidence: Answerer confidence 4/5Answerer confidence 4/5 peer agreement (net): +1
lending margins increased


Explanation:
A credit spread is the difference between the interest you pay and receive, ie your profit from lending.
To rally means to increase.

philgoddard
United States
Specializes in field
Native speaker of: Native in EnglishEnglish
PRO pts in category: 11

Peer comments on this answer (and responses from the answerer)
agree  Martin Riordan
1 hr

neutral  Charles Davis: Not here: this is about bonds
5 hrs
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9 hrs   confidence: Answerer confidence 4/5Answerer confidence 4/5 peer agreement (net): +1
the difference between the yield of government bonds and less secure corporate bonds decreased


Explanation:
And this is a good thing because it reflects a perceived increase in the strength of non-government bond issuers: companies.

"Credit spreads", in this context, refers to the difference in yield (that is, interest paid) on government (Treasury) bonds and that of other corporate bonds. The latter is always higher. The interest payable on bonds is a measure of risk (risk of default: not being able to pay back the principal when the bond matures): the lower the risk, the lower the interest. Government bonds have effectively no risk, since they are backed by the national Treasury, so they offer low interest. With non-government, corporate bonds, there is always some risk, especially over 10 years. So these bonds pay higher interest. The credit spread is the difference: how much more interest non-government bonds pay than government bonds.

This means that although the bond-holders are happy to get a high rate of interest, they are not happy with higher risk of losing their money. A wide credit spread is a sign of weakness in the economy generally because it means that credit risk, the risk of bonds defaulting, is high. So paradoxically, a narrower credit spread is better news for investors and the economy than a wider one.

"What is a 'Credit Spread'
A credit spread is the difference in yield between a U.S. Treasury bond and another debt security with the same maturity but of lesser quality. Credit spreads between U.S. Treasuries and other bond issuances are measured in basis points, with a 1% difference in yield equal to a spread of 100 basis points. Higher quality bonds, which have less chance of the issuer defaulting can offer lower interest rates. Lower quality bonds, with a higher chance of the issuer defaulting, need to offer higher rates attract investors to the riskier investment."
https://www.investopedia.com/terms/c/creditspread.asp

"Rally" means a sustained improvement, particularly from a poor position.

So paradoxically, if credit spreads "rally", that is, improve, it means they get smaller, not larger: they "tighten". That's why your text says "Cash spreads and CDS indices moved tighter"; it's another way of saying that they rallied.

Here's another use of the term that illustrates this:

"CDS update: Spreads rally in strong start to week
European credit spreads rallied in a strong start to the week. The Markit iTraxx Europe Series 11 index tightened by over 9bp to trade around 162.5bp, while the Markit iTraxx HiVol 11 index did even better, tightening to 348bp, 25bp tighter on the day."
https://ftalphaville.ft.com/2009/03/23/53906/cds-update-spre...

"Bond spreads tighten with improving economic conditions and widen with deteriorating economic conditions."
https://marketrealist.com/2016/04/widening-bond-spreads-indi...

CDS means credit default swaps: a way of insuring against the bond defaulting. If these rally it similarly means they narrow or tighten, a good sign for the economy in just the same way,

Charles Davis
Spain
Local time: 00:03
Native speaker of: Native in EnglishEnglish
PRO pts in category: 82

Peer comments on this answer (and responses from the answerer)
agree  William Xie
18 hrs
  -> Thanks, William :-)
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