What Is the Relationship between Bond Yields and CDS Spreads for the Same Entity?
Generally, there is a positive correlation between bond yields and CDS spreads for the same entity. A bond's yield spread over a risk-free rate represents the compensation an investor demands for taking on the credit risk of that bond.
Similarly, a CDS spread is the price of insuring against that same credit risk. Therefore, when the market perceives an increase in an entity's default risk, both its bond yields and its CDS spreads will typically rise together.
Glossar
Bond Yield
Valuation ⎊ Bond yield, within the context of cryptocurrency derivatives, represents the annualized rate of return an investor receives from holding a debt instrument ⎊ typically a stablecoin-backed bond or a tokenized traditional bond ⎊ and is crucial for pricing related options and swaps.
Risk-Free Rate
Rate ⎊ The risk-free rate represents the theoretical return on an investment with zero risk, serving as a critical input in option pricing models to calculate the cost of carrying an asset forward in time, particularly relevant for valuing longer-dated crypto options.
CDS Spreads
Derivatives ⎊ Credit default swap spreads, within cryptocurrency markets, function as a risk premium reflecting the perceived creditworthiness of underlying digital assets or associated lending protocols.
Bond Yields
Determination ⎊ Bond Yields, when referencing crypto-linked fixed-income instruments or structured products, represent the internal rate of return an investor expects to receive over the life of the instrument, factoring in coupon payments and final principal repayment.
Credit Risk
Exposure ⎊ The potential for financial loss due to the failure of a borrower or counterparty to fulfill their debt obligations, a key consideration when underwriting decentralized loans or providing liquidity to lending pools.
Positive Correlation
Relationship ⎊ Positive Correlation describes a statistical dependency where two or more variables, such as the price of a spot asset and the price of its related derivative, tend to move in the same direction over time, although the relationship is rarely perfect.