Is Credit Spread Risk essentially same as Interest rate risk or extremely correlated since when interest rates rise credit spread widens increasing the Cr. Spread risk???
Credit spreads do not necessarily widen when interest rates rise. Credit spreads change as the risk premium changes in corporate bonds over a comparable treasury. Of course you can measure a “spread” on multiple types of bonds. Lets say rates start out with 10 Yr Treasury = 5% and BBB 10 YR Corporate = 6% Then 3 months later, 10 Yr Treasury = 4.5% and BBB 10 Yr Corporate = 7% Spreads have widened dramatically in this example, and is very different than overall interest rate risk. Investors have priced a much higher premium to take on additional risk.
I would think they would be related but not the same. There are some factors that will effect credit spread besides interest rates. A general increase in risk (or perceived risk) in the stock market can alter credit spread risk. I don’t really have a good answer…just my thoughts.
Lance’s answer is much better.
Think of an applied CAPM scenario, if you increase the risk free rate and the market risk premium remains the same does the credit spread change (the answer I’m looking for here is no).