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Spread between US Treasuries and US Corporate Investment Grade Bonds Near 2-Year Lows

Nov 01, 2018


  • US Treasury Yields have been rising steadily over the past two years in conjunction with hawkish policy taken by the US Federal Reserve raising interest rates.
  • Two years ago, US 2-year Treasury bond yields were at 0.8311% and US 10-year Treasury bond yields were at 1.8274% while the Fed Funds Interest Rate was at 0.50%. 
  • Today, the US 2-year Treasury bond yield stands at 2.8669% with US 10-year Treasury bond yields at 3.1435%; Fed Funds Interest Rate is at 2.25%. 
  • US investment grade corporate bond yields, as measured by the Bloomberg Barclays US Aggregate 1-3 Year Index and the Bloomberg Barclays US Aggregate 10+ Year Index, are rising alongside US treasury yields.
  • Today, aggregate US investment grade corporate 1-3-year bonds generate yields of 3.04% while aggregate US investment grade corporate 10+-year bonds generate yields of 4.21%. 
  • The spread between US 2-year Treasury bonds and their US corporate investment grade counterpart is currently trending higher off its 2-year low of 0.1312%, set on September 28th, 2018. 
  • The 2-year low reached on September 28th, 2018 indicates the narrowest risk premium on 1-3 year US corporate investment grade bonds in almost 2 years.
  • The spread between US 10-year treasury bonds and US corporate investment grade 10+-year bonds is also near its 2-year low.
  • The current 10-year corporate-treasury spread of 1.07% is much wider than its 2-year counterpart. 
  • The higher spread for longer-term corporate debt suggests investors see higher risk in holding corporate debt over a longer period of time and require a higher yield to take on the risk. 
  • A fascinating observation is that over the past few weeks, as corporate-treasury spreads have narrowed, suggesting a greater risk appetite for corporate credits, the S&P 500 has dropped 6.3%. 
  • This would suggest there is a disconnect between stock investors and bond investors in regards to the appropriate market risk premium. 


Source: Bloomberg

Source: Bloomberg