Bond Spreads

Bond spreads are an important indicator of risk assessment.  We typically like to assess the spreads between rated corporate debt and the 10-year rate.

With the risk-free rate (the 10-year coupon) already at rock bottom, and the market-risk spreads (the difference between the risk-free rate and the nominal rate of interest on bonds) historically low, this was driving the cost of debt capital to record lows. 

When the coronavirus hit, the spreads jumped dramatically, by about 200 basis points.  As investors have assessed the recovery prospects after COVID, the spreads have declined by about 50% from their watermark in the two past weeks. 

With the market risk rates generally starting to narrow, the cost of borrowing for corporate and real estate customers may not be as onerous as once thought.  This is great news for economic growth, corporate investment, and the resumption of job gains.

FRED: Moody's Seasoned AAA Corporate Bond Yield Graph

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