Summary
Treasury bond yields have backed up on fears of oil-price driven inflation in the months ahead, this as the war in Iran remains unresolved. Corporate bond yields have risen as well — but at a slower rate as bondholders are now less concerned over the risks of recession, given positive trends in employment. As a consequence, spreads between corporate and Treasury bond yields have narrowed over the past quarter, and they remain below historical averages. For example, the spread between AAA-rated corporate bonds and 10-year government bonds in early June was 108 basis points (bps), down from 117 bps in March and below the historical average of 122. The gap between the government 10-year bond yield and a BAA-rated bond (still investment grade) in early June was 162 basis points, below the historical average spread of 227 bps and the spread of 168 basis points a quarter ago. We watch these spreads closely for several reasons. From an asset-allocation standpoint, wider corporate bond spreads signal that corporate b