Explanation

Credit spreads represent the additional yield investors demand to hold corporate bonds over risk-free government bonds. They widen (increase) when perceived credit risk increases or when market conditions deteriorate.

Option A: in periods of heavy new issue supply - CORRECT

• When there is heavy new issue supply of corporate bonds, the increased supply can overwhelm demand, putting downward pressure on bond prices and upward pressure on yields.
• This increased supply relative to demand causes credit spreads to widen as investors require higher compensation for absorbing the additional supply.

Option B: with expectations of a stronger economy - INCORRECT

• Expectations of a stronger economy typically lead to narrowing credit spreads, as improved economic conditions reduce default risk and increase investor confidence in corporate issuers.
• Stronger economic growth improves corporate earnings and cash flows, making it easier for companies to service their debt obligations.

Option C: with increased demand for corporate bonds - INCORRECT

• Increased demand for corporate bonds would typically cause credit spreads to narrow, as higher demand pushes bond prices up and yields down.
• When investors are eager to buy corporate bonds, they are willing to accept lower yields relative to government bonds, resulting in tighter spreads.

Key Concept: Credit spreads are influenced by supply-demand dynamics, economic conditions, and risk perceptions. Heavy new issuance increases supply, which typically widens spreads unless matched by sufficient demand.