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Can you clear up what "spreads" are for us?

When people talk about spreads, they are talking about the difference between the yield of a corporate or municipal bond and the yield earned on a U.S. Treasury bond for the same maturity. The lower the spread, the more people feel comfortable with the company's likelihood of paying off the debt. If the spread is high, that means people are concerned.

The U.S. Treasury rate is your risk-free rate. There is very little chance of Treasuries defaulting. Investors use that as a starting point and then add premium to the rates depending on the chance of a company going bankrupt.

By way of example, up until now General Electric (NYSE: GE) usually has been able to issue bonds at a spread + 50 bps (basis points) to the Treasuries. So if the 5-year U.S. Treasury is yielding around 3%, then GE is able to sell their bonds at a yield of around 3.5%. On the other hand if you are looking at General Motors (NYSE: GM), then the spread may be +400 bps to the Treasuries.

As investors feel uncomfortable about a company, the yield spreads on their bonds start to rise. So right now financial companies yield spreads are shooting up.

I was offered a bond issued by Citigroup (NYSE: C) that will mature in 5 months and it is yielding around 6.3%. For comparison's sake, 6-month Treasuries are yielding around 1.5%. So the spread is around 480 bps. That is junk bond territory.

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