Credit Spreads in 2025: What Australians Need to Know

From home loans to corporate bonds, credit spreads play a starring role in Australia’s financial system. As we move through 2025, the spotlight on these spreads has only grown brighter. With the RBA’s ongoing rate recalibrations and global economic shifts, understanding credit spreads is essential for both borrowers and investors. Let’s break down what credit spreads mean, why they’re moving this year, and how they might affect your financial decisions.

What Exactly Is a Credit Spread?

At its core, a credit spread is the difference in yield between two debt securities of similar maturity but different credit quality. Most commonly, it’s referenced as the gap between a government bond (like an Australian Commonwealth Government Bond) and a corporate bond. The spread compensates investors for taking on extra risk—if a company or borrower is seen as riskier, the spread (and thus their borrowing cost) widens.

• For borrowers: Wider credit spreads mean higher interest rates on loans and bonds.

• For investors: Wider spreads offer higher potential returns—but with greater risk of default.

In practical terms, if the 10-year Australian government bond is yielding 4% and a major bank’s 10-year bond is yielding 5.2%, the credit spread is 1.2% (or 120 basis points).

Credit Spreads in 2025: What’s Driving the Changes?

This year, credit spreads have been anything but static. Several factors are shaping their direction across the Australian economy:

• RBA Policy Shifts: After a cycle of aggressive rate hikes through 2023-24, the Reserve Bank of Australia has signalled a more cautious approach in 2025, keeping the cash rate steady at 4.35%. This stability has helped narrow some credit spreads, especially among high-grade issuers.

• Global Economic Volatility: Ongoing uncertainty in major economies, particularly China and the US, has contributed to periods of volatility. When global risk sentiment sours, investors demand a higher premium for riskier Australian debt, widening credit spreads.

• Corporate Health: Australian corporates have generally maintained strong balance sheets, but sectors like commercial real estate and retail have seen spreads widen due to concerns about earnings and refinancing risks.

For example, in early 2025, the spread between major bank senior bonds and government bonds narrowed to around 85 basis points—a sign of market confidence. In contrast, lower-rated corporate bonds saw spreads widen to over 250 basis points following several high-profile insolvencies in the construction sector.

Why Credit Spreads Matter to Everyday Australians

Credit spreads aren’t just a tool for fund managers—they impact real-world costs and investment returns:

• Home Loan Rates: Banks base their mortgage pricing off the cost of funding, which includes credit spreads. If spreads widen, expect higher variable and fixed-rate home loans.

• Superannuation Returns: Many super funds invest in corporate bonds. Wider spreads may signal higher yields, but also greater risk of defaults impacting returns.

• Business Borrowing: Small and medium enterprises (SMEs) face higher loan costs if risk premiums rise, especially in industries flagged as higher risk by lenders.

Consider the recent uptick in SME loan rates: as commercial property-related credit spreads jumped by 40 basis points in Q1 2025, some business owners saw their interest payments rise despite the RBA holding rates steady.

Reading the Signals: What to Watch in 2025

With ongoing geopolitical and economic shifts, credit spreads will remain a barometer of risk. Here’s what savvy Australians should monitor:

• Government Bond Yields: Spreads are measured relative to these. Watch for shifts in the 3-, 5-, and 10-year yields.

• Corporate Earnings Reports: Weak results can drive spreads wider for specific sectors.

• Global Events: US Federal Reserve or European Central Bank decisions can ripple through global credit markets, affecting Australian spreads almost overnight.

For investors, a sudden spike in spreads may be a buying opportunity—or a warning sign to tread carefully. For borrowers, keeping an eye on spreads can offer clues about where loan rates are headed next.