Chip Rout Drags Nasdaq Down 2.1% and Hands Wall Street Its Worst Week Since June

Credit Default Swap (CDS) Spread

A credit default swap is a contract that works like insurance on a company's debt. The buyer pays a regular premium to the seller, and in return the seller pays out if the borrower defaults. The premium, quoted as an annual spread in basis points on the amount insured, is the market's price of default risk: a 100 bps spread means roughly $100,000 a year to insure $10 million of debt. Because CDS trade continuously, the spread acts as a real-time fear gauge for a specific borrower. Investment-grade companies often trade below 100 bps, while spreads in the high hundreds or above 1,000 bps signal that the market sees a meaningful chance of distress. CDS spreads usually move alongside bond yields: when investors demand more yield to hold a company's bonds, the cost of insuring those bonds rises too, and bond prices fall. The spread also embeds assumptions about how much creditors would recover in a default. A high spread therefore reflects both a higher probability of default and the expected loss if it happens. Equity investors watch it because a rising spread often warns of trouble before the stock reflects it, and because it raises the cost of the borrowing that growth companies depend on.