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Bond Spreads Tight

Treasury bond yields have declined in on fears that coronavirus will reduce global growth. Corporate bond yields, meanwhile, have declined as well, as investors seek income in a low-rate environment. Consequently, spreads between corporate and Treasury bond yields have tightened, and are narrower than historical averages. The spread between AAA-rated corporate bonds and 10-year government bonds in January was 118 basis points, below the 35-year average of 123 bps and down five bps from last July. The gap between the government 10-year bond yield and a BAA-rated bond in January was 201 basis points, below the historical average spread of 232 bps and down 20 basis points from last July. From a risk management standpoint, we watch these spreads closely to gauge the bond market's view of corporate financial strength, which appears to be sanguine, given the low yields. From an investment standpoint, we continue to think that corporate bonds are fairly valued versus Treasuries, if not overvalued. ...  The gap between the government 10-year bond yield and a BAA-rated bond in January was 201 basis points, below the historical average spread of 232 bps and down 20 basis points from last July. From a risk management standpoint, we watch these spreads closely to gauge the bond market's view of corporate financial strength, which appears to be sanguine, given the low yields. From an investment standpoint, we continue to think that corporate bonds are fairly valued versus Treasuries, if not overvalued.   more

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