Long Term Perspective
The spread relationship between this group of bonds (government agency, mortgage-backed, and asset-backed) and the 10-year Treasury note yield appears a bit odd because one would still expect the U.S. Treasury security to have a lower risk yield than any of these other securities. It is possible that government agency bonds have a lower average yield that the 10-year note because the average maturity of bonds measured in this compilation is not uniform. If government agency bonds have a shorter maturity - such as 5-years rather than 10 years, the government agency issues will have lower yields than the average 10-year Treasury security.

Similarly, asset-backed bonds could have a shorter maturity than the 10-year note, thus creating nominal yields that are lower than the longer-term Treasury security. Mortgage backed bonds seemed to hold a steady relationship during the 1990s, but the spread differential narrowed from the 1980s to the 90s to the 2000 to 2004 period. This is primarily due to the vast amount of refinancing activity that has occurred in recent years. Refinancing activity was certainly not the norm in the 1980s, although it was beginning to gain popularity in the second half of the decade.

Short Term Perspective
Government agency bonds were 7 basis points lower than the 10-year Treasury note, on average, in 2005. This compares with a negative spread of 70 basis points in 2004. One would expect to see higher yields on government agency bonds than on Treasury yields. Mortgage backed bond yields were 86 basis points higher than the 10-year Treasury, an increase from the 2004 spread of 50 basis points. Asset-backed bond yields were 15 basis points higher than the 10-year Treasury in 2005, a sharp change from 2004 when these yields were 94 basis points lower than the Treasury security. In late 2005 and over most of 2006, government agency bond yields were marginally above 10-year Treasury yields, with the November 2006 spread at 2 basis points. The spread on mortgage backed bonds rose late in 1005 and in early 2006 but has since narrowed moderately to 89 basis points in November 2006. The spread on asset-backed bonds also widened in late 2005 and early 2006 and has shrunk somewhat to 41 basis points in November 2006.

Yields in this segment fell in November between 12 basis points and 15 basis points; in contrast the yield on the 10-year Treasury note fell 13 basis points.