Long Term Perspective
In 2000, the U.S. Treasury announced that they would borrow less and therefore issue fewer securities. This lifted prices of Treasury securities and reduced their yield. However, it did not imply that corporate bond yields would be lower, so the gap between corporate bond and Treasury yields widened. In 2001, the gap widened further - this time caused by deteriorating credit conditions in a softening economy.

Short Term Perspective
Fears of economic recession increase the default risk even of high-grade bonds. In the past six months, yields on corporate and Treasury securities have edged down because the economy is recovering at a slower pace than they had anticipated. In November, the yield gap between these two securities decreased slightly to 226 basis points, from October's spread of 238 basis points. As the spread narrows, it means that bond investors are less worried about default risk on corporate bonds.

2-year Treasury Yield & Spread to Fed Funds   •   10-year Treasury Yield & Spread 10-year less 2-year

Yield Spread: Aaa Corporate vs. 10-year Treasury   •   Yield Spread: Baa Corporate vs. 10-year Treasury

Yield Spread: Bond Buyer vs. 10-year Treasury