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The U.S. Investment-Grade Composite Credit Spread Reached A New High For 2011

Publication date: 09-Aug-2011 13:49:08 EDT

Standard & Poor's investment-grade composite spread hit a new high for the year on Aug. 8. The composite spread widened by 10 basis points (bps) to 186 bps as the continued flight to quality led to lower Treasury yields. This year's previous high for the investment-grade composite spread was 177 bps, reached on Jan. 10. In comparison, Standard & Poor's speculative-grade composite has extended its high to 655 bps.

Much of the expansion we've seen in the investment-grade spread over the past week is a result of falling yields on the 10-year Treasury bonds. Since July 29, the investment-grade composite has widened by 16 bps, while the yield on the 10-year Treasury has declined by 47 bps to 2.35%. Standard & Poor's investment-grade spread captures the spread differential between yields of investment-grade bonds (rated 'BBB-' and higher) and 10-year Treasuries.

Although the investment-grade spread has reached its highest point for the year, it remains well below its five-year moving average of 229 bps, and it's only moderately higher than its one-year moving average of 179 bps. At this time last year, the investment-grade spread was at 197 bps. During the past five years, the spread reached its highest point--578 bps--on Dec. 17, 2008, while the lowest level was 120 bps on March 9, 2007.

We expect continued volatility in the near term, especially in the speculative-grade segment. On the positive side, we expect U.S. corporate defaults to remain low in the short term. On the negative side, an increase in volatility in the financial markets, influenced partially by sovereign rating concerns, could continue to weigh on risky assets.

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Standard & Poor's Global Fixed Income Research provides U.S. option-adjusted spread composites consisting of more than 13,000 investment-grade and speculative-grade issues. Credit spreads are a measure of the market's valuation of credit risk and are quoted in basis points (one-hundredth of a percentage point). They reflect daily movements in credit spread levels within various bond market sectors.

The spreads are calculated daily above the U.S. Treasury yield curve for various bond market sectors, subsectors, rating categories, rating designations, outlooks, CreditWatch placements, and maturities. Issues included in the composite bond spread calculations have the following characteristics:

  • Face amount outstanding of at least $100 million.
  • U.S. dollar-denominated issues of companies domiciled within or outside the U.S.
  • Rated by Standard & Poor's Ratings Services.
  • Issues may have embedded call, put, and sinking fund options.
  • Fixed-coupon bonds, excluding convertible, step-up, and preferred securities.
Global Fixed Income Research:Diane Vazza, Managing Director, New York (1) 212-438-2760;
Evan Gunter, Associate, New York (1) 212-438-6412;

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