WHAT DOES IT MEAN?
Credit spread refers to the difference in the yield between two bonds of the same maturity but with differing credit quality.
It is a direct measure of the cost of risk, or the extra yield investors demand to take on a bond with a certain level of risk of defaulting, like corporate bonds, versus a risk-free benchmark security, such as United States Treasury bonds.
The width of the spread represents the difference in credit risk levels.
The lower the credit quality and rating of a bond, the higher the risk, resulting in a wider spread.
WHY IS IT IMPORTANT?
Credit spreads can be an important indicator of investor sentiment and the overall well-being of the economy.
When the spreads widen between different bonds of different risk ratings, investors can conclude that the market is factoring more risk of default on lower-grade bonds, implying that the economy is deteriorating.
Likewise, when the spread narrows, the market is considered to have expected a lower default risk brought about by a recovering economy.
Credit spreads are used by investors to strategise and make profitable trades. As a bond's yield is inverse to its price, the credit spread gives investors an idea of how cheap (wide spread) or expensive (narrow spread) the market is for a particular bond category or bond.
IF YOU WANT TO USE THE TERM, JUST SAY:
"Credit spread analysis can be used to compare any two fixed-income instruments to determine the investment opportunities by analysing the risk versus return."