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Bond Spreads Tighten a Bit

Treasury bond yields declined in a flight-to-quality reaction to uncertainty in the UK, EU and China, among other factors. Corporate bond yields, meanwhile, fell faster as U.S. GDP continues to expand. As such, spreads between corporate and Treasury bond yields have tightened, though they remain higher than levels six months ago. The spread between AAA-rated corporate bonds and 10-year government bonds in April was 116 basis points, below the 35-year average of 123 bps and down 4 bps from March -- but up 17 bps compared to October. The gap between the government 10-year bond yield and a BAA-rated bond in April was 217 basis points, up a wider 25 basis points compared to October -- but also below the historical average and down month to month. We watch these spreads closely to gauge the bond market's view of corporate financial strength, which appears to be improving. From an investment standpoint, we continue to think corporate bonds are fairly valued versus Treasuries, if not overvalued. We favor U.S. Treasuries for the core of a portfolio. In terms of duration, we favor the intermediate-term; a laddered strategy potentially will allow proceeds from newly matured bonds to be reinvested at higher rates. ...  the historical average and down month to month. We watch these spreads closely to gauge the bond market's view of corporate financial strength, which appears to be improving. From an investment standpoint, we continue to think corporate bonds are fairly valued versus Treasuries, if not overvalued. We favor U.S. Treasuries for the core of a portfolio. In terms of duration, we favor the intermediate-term; a laddered strategy potentially will allow proceeds from newly matured bonds to be reinvested at higher rates.    more

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