What Is an Intramarket Sector Spread?
- Intramarket sector spread refers to the difference in yield between two fixed-income securities that have the same maturity, and are within the same market sector.
- Intramarket sector spreads can be useful in distinguishing the creditworthiness of one company versus another.
- Intermarket sector spreads, as opposed to intramarket sector spreads, deal with the yield spreads between two bonds in different sectors of the market.
Understanding Intramarket Sector Spread
An intramarket sector spread can also be used to compare relative credit ratings between companies within the same sector. Firms issuing debt with an equal term, if all else is held constant, will only exhibit yield differences as a result of their credit ratings. As a result, intramarket sector spreads can be useful in distinguishing the creditworthiness of one company versus another.
The bond market is carved into different sectors based on the issuer. Typically, these sectors are U.S. government and agency securities, corporate bonds, mortgage- and asset-backed bonds, municipal securities, and foreign bonds. These sectors can be broken down even further into market sectors and industries. Within the corporate sector, for example, issuers can fall into one—and sometimes more categories—such as industrials, utilities, financials, and banks.
To illustrate this concept, a yield discrepancy between two transportation corporate bonds with the same maturity would constitute an intramarket sector spread. If, at issuance, the bonds trade with an equal coupon rate (yield), and in the future, a spread develops between the two bonds, the most probable reason for the difference would be a change in credit rating for one of the transportation companies.
Intramarket Sector Spread Example
Suppose that company X issued a $75 million bond that is due in five years, with a 5% yield to maturity. The bond was rated A- by Standard & Poor’s (S&P). At the same time, company Y also issued a five-year, $75 million bond. However, it was sold with a 6% yield to maturity because the bond was rated BBB by S&P. The 1% difference in yield, in this instance, is the intramarket sector spread; the difference in yield was only due to the difference in credit ratings.
Intramarket Sector Spreads vs. Intermarket Sector Spreads
An intramarket sector spread is a measure of the yield spread between two bonds that are in the same market sector. This can be done by developing a yield curve that is similar to the Treasury yield curve, but that instead uses the issuers' securities to develop the curve.
On the other hand, intermarket sector spreads deal with the yield spreads between two bonds in different sectors of the market. The most popular type of intermarket sector spread is a non-Treasury security compared to a comparable Treasury security. (A comparable Treasury security would be defined, in this instance, as one with the same maturity.)