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Credit Curves, IG, and HY

One-line definition

The term structure of credit spread by tenor for a given issuer or rating bucket — same idea as a Treasury zero curve, applied to credit spread.

Construction

Reuse interpolate_zero_rate from src/pm/fixed_income/curve.py on spread points instead of yield points — a credit curve is interpolated the same way a rates curve is.

Vocabulary

  • Investment grade (IG): rated BBB-/Baa3 or above — lower spread, lower default probability.
  • High yield (HY): rated BB+/Ba1 or below — higher spread, higher default probability, more convex to spread widening.
  • IG and HY often move together directionally but with very different magnitudes — see use_cases/spread_shock/README.md.

Why PMs care

Credit curve shape (steep vs. flat, IG vs. HY) reflects the market's view of near-term vs. long-term default risk for that issuer or sector.

Common mistakes

  • Interpolating spread the same way for IG and HY without comment. The mechanics are identical, but HY spreads are far more convex to widening, so a linear interpolation between sparse HY points understates the move more than it does for IG.
  • Reading curve steepness as a pure default-timing view. Shape also reflects liquidity, issuance, and index composition, not just the market's term structure of default risk.
  • Treating a rating bucket as an issuer curve. A BBB sector curve is an average; a specific issuer can trade far off it, and pricing an issuer off the bucket hides exactly the idiosyncratic risk you are paid for.
  • Discounting with spread alone. A credit-risky bond is priced off the risk-free curve plus the spread — see Z-spread.