Long Term Perspective

Equity investors know that various sectors of the economy perform differently over the business cycle. Thus, stock prices will ebb and flow with or against economic activity. Similarly, bonds in various sectors of the economy will bear different risk levels, just like stocks, depending on economic activity. For instance, among this group (utility, finance and industrial), traditionally finance sector bonds offered yields that were lower than the industrial and utility sectors, probably because these were viewed as having lower risks of default over the time horizon. This changed during the recent financial crisis and financial institutions’ balance sheets were seen as suspect.  By 2011 and early 2012, the stability of financial institutions was seen as improved although doubts remained about European sovereign debt issues.

Short Term Perspective

From mid-2007 and into mid-2008, the spreads between corporate bond yields and the 10-year Treasury note were higher. But in autumn 2008, spreads jumped sharply due to a worsening recession and elevated credit concerns. But during spring and summer of 2009, signs of easing in the recession and hints of recovery lowered spreads for utilities, finance, and industrials.  This softening in spreads continued into 2011. But by mid-2011, the spreads turned up as flight to safety over European sovereign debt concerns led to significantly lower Treasury rates.  This reversed in late 2011 and in 2012 as corporate rates eased.

In October, the spreads for finance, utilities, and industrial bonds stood at 82 basis points, 118 basis points, and 86 basis points, respectively.

In October, finance bonds fell 10 basis points to 2.57 percent. Utility bonds declined 11 basis points to 2.93 percent. Industrial bonds eased 9 basis points to 2.61 percent in October while the 10-year Treasury note firmed 3 basis points to 1.75 percent.