Long Term Perspective

The spread between the 10-year Treasury note yield and industrial corporate bond yields was wide even when economic activity was robust in the late 1990s. The wide gap during the recession and early stages of recovery was not surprising however. Yield differences moderated for energy and manufacturing, although not entirely for the transportation sector in 2003 through 2006. The transportation sector includes the airline industry which was quite sick not long ago. Thus it is not surprising that yields in this sector were higher than the rest in 2003 and 2004 when the airline industry was most recently weakest.

Short Term Perspective

Yield spreads between corporate bonds and Treasuries generally trended downward from 2005 to 2006 but reversed in the second half of 2007. Transportation bond yields were 109 basis points higher than the 10-year Treasury in 2006, up from a 122 basis point spread in 2005. Manufacturing bond spreads fell to 102 basis points in 2006 from 145 basis points in 2005. In November, the spreads for transportation, energy, and manufacturing were 163 basis points, 155 basis points, and 136 basis points, respectively.

Corporate bonds in November declined in the energy, manufacturing, and transportation sectors – by 17 basis points, 29 basis points, and 20 basis points, respectively. The 10-year Treasury note yield was down 38 basis points.