A credit curve visualization is a graphical representation (typically a line chart) of the credit curve for a bond issuer. Usually, the vertical axis is the credit spread of the security in basis points and the horizontal axis is bond maturities in years. It shows the relationship between the return over the risk-free rate offered by the security, known as the credit spread, and the time to maturity of the security.

Credit curves normally slope upward from left to right, indicating higher credit risk for longer maturity bonds.

The credit spread of a bond is determined by the issuer’s credit strength, comparable issuers in the market, and underlying market conditions. Credit spread has an inverse relationship with credit market conditions. In a bearish market, the credit spread will increase (widen), and it decrease (tighten) in bullish market conditions.

Major factors affecting the credit spread include:

  • Market conditions – investors will require higher returns to compensate for the increased risk of investing in poor market conditions, resulting in a wider credit spread.

  • Company financial strength – declining financial health will increase the likelihood that the issuer will default on their bonds, causing the credit spread to widen to reflect this increased risk.

  • Company outlook – corporate events (e.g. mergers, bankruptcy, earnings call) can reveal new information in the market that will be reflected in the credit spread. A negative corporate event will cause the credit spread to widen.