What distinguishes corporate bonds from risk-free Treasuries?

Corporate bonds and risk-free Treasuries can be distinguished primarily by the concept of credit spreads. Credit spreads refer to the difference in yield between corporate bonds and risk-free Treasuries, which is primarily driven by the differing levels of credit risk associated with each type of bond.

Treasuries are backed by the full faith and credit of the U.S. government, making them essentially risk-free in terms of credit default. In contrast, corporate bonds are issued by private companies, which carry varying levels of credit risk depending on the financial health and stability of the issuing corporation. This risk necessitates a higher yield for corporate bonds compared to Treasuries to compensate investors for taking on that additional risk.

The presence of credit spreads reflects market perceptions of creditworthiness and potential default, thus serving as an indicator of relative risk. Understanding credit spreads is crucial for investors when assessing the risk-return profile of different fixed-income investments, making them a key differentiator between corporate bonds and Treasuries.