What is an Intramarket Sector Spread

Intramarket sector spread refers to the yield spread between two fixed-income securities that have the same maturity, and are within the same market sector. The intramarket sector spread can also be used to compare relative credit ratings between companies within the same sector. This is due primarily to the fact that 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.

BREAKING DOWN Intramarket Sector Spread

Intramarket sector spreads can be a useful evaluation method to distinguish the creditworthiness of one company versus the other. 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 (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

In this hypothetical scenario, company X issued a $75 million bond that is due in five years with a 5 percent yield to maturity and 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, except that it was sold with a 6 percent yield to maturity because the bond was rated BBB by S&P. The 1 percent difference in yield in this instance is the intramarket sector spread, because the difference in yield was only due to the difference in credit ratings.

Comparing Intramarket and Intermarket 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. Intermarket sector spreads, on the other hand, 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.