How do wider spreads in bond markets affect investors' perception of risk?

Wider spreads in bond markets generally indicate higher perceived risk among investors. When there is a larger difference between the yields of different bonds, it suggests that investors are demanding a higher return for taking on additional perceived risk associated with certain bonds compared to others. This can occur in times of economic uncertainty or when a specific issuer's financial health is called into question.

In essence, when spreads widen, it reflects market participants' concerns about credit quality, potential defaults, or overall market volatility. Investors may be more hesitant to lend to issuers perceived as risky, and as a result, they require a greater yield to compensate for this uncertainty. This dynamic illustrates how bond market behaviors can serve as indicators of overall risk sentiment in the economy, emphasizing that wider spreads are associated with an increase in perceived risk rather than a decrease or stability.