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

    What is Spread?

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

    Trading Calendar Spreads In Grain Markets

    Futures investors flock to spreads because they hold true to fundamental market factors.
  4. 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.
  5. Investing

    Why Is Spread Betting Illegal In The US?

    Spread betting is a speculative practice that began in the 1940s as a way for gamblers to win money on changes in the line of sporting events. But by 1970, the phenomenon trickled into the financial ...
  6. Trading

    Option Spread Strategies

    Learn why option spreads offer trading opportunities with limited risk and greater versatility.
  7. Investing

    Spread Betting: OK in the U.K., Illegal in the U.S.

    The U.K. practice of spread betting is illegal in the U.S. because it is considered a form of online gambling, banned in 2006. Is there a U.S. equivalent?
  8. Trading

    Get Positive Results With Negative Basis Trades

    Capitalize on the difference in spreads between markets with this popular strategy.
Frequently Asked Questions
  1. Why Do Most of My Mortgage Payments Start Out as Interest?

    Fear not: Over the life of the mortgage, the portions of interest to principal will change.
  2. What is the difference between secured and unsecured debts?

    The differences between secured and unsecured debt, and how banks buffer risks associated with each type of loan through ...
  3. How Many Times has Warren Buffett Been Married?

    Warren Buffett has been married twice in his life, but the circumstances surrounding the marriages were unconventional.
  4. What's the smallest number of shares of stock that I can buy?

    Many people would say the smallest number of shares an investor can purchase is one, but the real answer is not as straightforward. ...
Trading Center