Corporate / Treasury Credit Spreads: How the Markets Are Pricing Risk

A few months ago I wrote about fear indicators and how, at the time, they were all flashing bright screaming red. I also watch spreads between Corporate bonds and Treasuries. This graph is the one month price action on the spread between the iShares Investment Grade Corporate Bond ETF (LQD) and the iShares 7-10 Treasury ETF (IEF). It's not a perfect representation of credit spreads but it's sufficient for my purposes.

The graph is constructed to show the inverse of the spread. Generally, a widening credit spread means the market is assigning more risk to corporates. In this case, a rising line means Corporates are outperforming Treasuries. A couple years ago, in fact, Corporates were trading near parity with Treasuries and why anyone would own Corporates in that scenario is totally beyond me. GE, for example, is a fine company but is it as secure as the the United States Government? Oh, wait, I should probably rethink that analogy...

Nevertheless, an uptrend on the graph means the LQD is outperforming the IEF (going up more or going down less). Setting aside the big spikes (each line represents the bid/ask of the hypothetically combined security), notice that it bottomed, for now, on 8/21. For those who are glued to the market's every move, you can view the relative performance of both ETFs on nearly any investing website that offers charting. It'll give a good window into how credit markets are pricing risk.