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.

Short Term Perspective

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.  However, spreads rose later in 2011 on flight to safety.  More recently in 2012, corporate rates eased on a slower economy and flight to safety in U.S. securities.  In October, the spreads for transportation, energy, and manufacturing stood at 117 basis points, 109 basis points, and 87 basis points, respectively.

Corporate bonds yields in October declined for the month in these sectors.  Energy was down 18 basis points to 2.84 percent while manufacturing decreased 5 basis points to 2.62 percent.  Transportation declined 8 basis points to 2.92 percent. The 10-year Treasury note yield edged up 3 basis points to 1.75 percent.