The bond market is carved into different sectors based on the issuer. Typically, these sectors are:
1. U.S. Government Securities
2. U.S. Government Agency Securities
3. Municipal Securities
4. Corporate Bonds
5. Mortgage Backed Bond
6. Asset Backed Bonds
7. Foreign Bonds

These sectors also can be broken down even further. For example, in the Corporate Sector, issuers can fall into one and sometimes more categories such as industrial, utilities, financials and bank.
Spreads tend to be wider the farther one goes out the curve.
Spreads can be based on individual sectors or crossed between them.

Intermarket Sector Spreads
Intermarket sector spreads deal with the yield spreads between two bonds in different sectors of the market. The most popular of these is a non-treasury security as opposed to a comparable treasury security. A comparable treasury security would be one with the same maturity.

Intramarket Sector Spreads
Intramarket sector spreads deal with the yield spread between two bonds in the same market sector. This can be done by developing a yield curve that is similar to the treasury yield curve but instead using the issuers' securities to develop the curve.

Some other factors that affect spreads between bonds besides maturity are credit risk, any options that the bonds may have, the liquidity of the issuers and the tax bracket of investors who receive interest payments.

Credit Spreads and Their Relationship to Economic Activity
A Credit Spread is the yield spread between non-treasury and treasury securities. These are equal in all respects except their individual credit ratings. This means that their maturities are the same and that there are no options thrown into the equation.


Look Out!

It is important to note that spreads increase with maturity and lower credit ratings.

Spreads interact with economic growth or decline in two key ways:

1. Spreads narrow or tighten - When the economy is growing, cash flows are increasing. Therefore, a corporation should have an easier time paying off its debt. Individuals will purchase more non-treasury securities than treasury securities because the increased economic activity reduces the default risk, causing spreads to tighten.

2. Spreads widen - When economy is faltering or slowing down, spreads widen. When this happens, the possibility of defaults increases because cash flows are declining. Individuals will sell or dump non-treasury securities for government securities because there is less of a chance that the government will default on their debt when compared to a corporation. This is also known as a flight to safety.

Options and their Benefits

Related Articles
  1. Investing

    Understanding Yield Spread

    Yield spread is the difference in yields between debt instruments.
  2. Investing

    Corporate Bonds: An Introduction To Credit Risk

    Corporate bonds offer higher yields, but it's important to evaluate the extra risk involved before you buy.
  3. Investing

    What is Spread?

    Spread has several slightly different meanings depending on the context. Generally, spread refers to the difference between two comparable measures.
  4. Trading

    Explaining Credit Spread

    A credit spread has two different meanings, one referring to bonds, the other to options.
  5. Trading

    Trading Calendar Spreads In Grain Markets

    Futures investors flock to spreads because they hold true to fundamental market factors.
  6. Investing

    How To Calculate The Bid-Ask Spread

    It's very important for every investor to learn how to calculate the bid-ask spread and factor this figure when making investment decisions.
  7. Trading

    S&P 500 Options On Futures: Profiting From Time-Value Decay

    Writing bull put credit spreads are not only limited in risk, but can profit from a wider range of market directions.
  8. Trading

    Vertical Bull and Bear Credit Spreads

    This trading strategy is an excellent limited-risk strategy that can be used with equity as well as commodity and futures options.
Frequently Asked Questions
  1. I'm about to retire. If I pay off my mortgage with after-tax money I have saved, I can save 6.5%. Should I do this?

    Only you and your financial advisor, family, accountant, etc. can answer the "should I?" question because there are many ...
  2. My wife and I both converted our Traditional IRAs to Roth IRAs over a decade ago and have invested the maximum allowed each year since. We're buying our first home soon. Do we both qualify for one-time, tax-free, $10,000 distributions?

    You and your spouse each qualify for a penalty-free distribution of up to $10,000 for the purchase, acquisition or construction ...
  3. Is a Thrift Savings Plan (TSP) a qualified retirement plan?

    Take advantage of the government's retirement plan for employees with the Thrift Savings Plan. As with a 401(k), contributions ...
  4. Who manages the assets in a Roth 401(k) account?

    Learn how to personally manage the assets in your Roth 401(k) plan and determine the best options available to help meet ...
Trading Center