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Interest Rate Spread Between Similar-Maturity Corporate Bonds and US Treasuries to Monitor the Health of US Credit Markets

 

This interest rate spread is defined as the difference between a similar-maturity corporate bond and a US treasury bond.  This spread is one way to gauge the health of the US credit markets.  When the spread is high as compared to historical levels, it implies a greater anticipated default risk of US corporations.  When the spread is low as compared to historical levels, it implies a low anticipated default risk of US corporations and a greater availability of credit.  Below is a chart of this spread from June 1989 to October 2009.  One interesting data point is how this spread climbed to 4.41% by the end of September 2008, giving us a warning that the US credit markets were seizing-up.  One month later the US stock market crashed 35% in 14 trading days.