Explanation

During periods of widening credit spreads:

• Lower-rated bonds (high-yield/junk bonds) experience larger spread widening than higher-rated bonds
• This is because lower-rated companies have:
  • Higher default risk
  • Less financial flexibility
  • Greater sensitivity to economic downturns
• Investors demand higher compensation for taking on additional risk during uncertain economic times
• The "flight to quality" phenomenon causes investors to move from lower-rated to higher-rated bonds, further widening spreads on lower-rated issues

Therefore, credit spreads on bonds with low credit ratings widen more than those with high credit ratings.