Long Term Perspective

The spread between the 10-year Treasury note yield and industrial corporate bond yields was wide even when economic activity was robust in the late 1990s. The wide gap during the recent recession and early stages of recovery has not been surprising, however. Yield differences moderated for energy and manufacturing, although not entirely for the transportation sector in 2003 through 2006. The transportation sector includes the airline industry. Recently, more stable credit markets and continued recovery have lowered perceived risk in these bonds.

 

Yield spreads between corporate bonds and Treasuries generally trended downward from 2005 to 2006 but reversed in the second half of 2007 and into late 2008. These spreads hit a recent peak in October 2008 on recession concerns and worries over health of credit markets.  In October 2008, the spreads for transportation, energy, and manufacturing were 530 basis points, 500 basis points, and 483 basis points, respectively, and at or near recent highs. 

 

But spreads came down during 2009 and into early 2011 as recovery settled in and financial markets soothed.  However, spreads rose later in 2011 on flight to safety, largely on concerns about European sovereign debt.  Overall rates rose in mid-2013 on taper talk but nudged down in early 2014 on clarification that Fed taper would be measured and gradual.

 

 

 

Short Term Perspective

In 2012, corporate rates eased on a slower economy but firmed in very early 2013 on better economic news. Then rates weakened in spring 2013 on disappointing indicator data.  Fears of Fed tapering lifted rates in mid-2013.  Lack of acceleration (beyond early scheduled taper) in Fed taper in 2014 led to some easing in yields.  Most rates fell in early 2015 on geopolitical worries and flight safety

 

In March 2015, the spreads for transportation, energy, and manufacturing stood at 97 basis points, 169 basis points, and 82 basis points, respectively.

 

Corporate bonds yields in March decreased for the month in these sectors.  Energy was down 7 basis points to 3.73 percent; manufacturing, down 7 basis points to 3.73 percent; and transportation down  1 basis point to 3.01 percent. The 10-year Treasury note yield rose 6 basis points to 2.04 percent.