Long Term Perspective

Equity investors know that various sectors of the economy perform differently over the business cycle. Thus, stock prices will ebb and flow with or against economic activity. Similarly, bonds in various sectors of the economy will bear different risk levels, just like stocks, depending on economic activity. For instance, among this group (utility, finance and industrial), finance sector bonds offered yields that were lower than the industrial and utility sectors, probably because these were viewed as having lower risks of default over the time horizon.

Short Term Perspective

In 2006, the spreads between corporate bond yields and the 10-year Treasury note were mixed. For utility bonds, the spread increased to 118 basis points from 96 basis points in 2005; for finance sector bonds, the spread increased to 78 basis points from 58 basis points in 2005; and for industrial bonds, the spread fell to 108 basis points from 112 basis points in 2005. More recently, the spreads for finance, utilities, and industrial bonds stood at 149 basis points, 154 basis points, and 147 basis points, respectively, in November.

For all three corporate bonds, yields decreased 16 to 22 basis points in November while the 10-year Treasury note yield fell 38 basis points.