Looking At The Bond Markets: Growing Weaknesses?

Oct. 13, 2015 11:54 AM ETAGG, JNK, HYG, LQD4 Comments
John M. Mason profile picture
John M. Mason


  • Attention this year has generally been focused on the government bond market where the yield on the 10-year bond is just above 2.00 percent, pretty low.
  • However, even as the yield on government bonds have fallen this year, the spreads between government's and high grade corporate bonds have risen, and between high grade and lower grades.
  • In addition, downgrades are up, defaults are up, and cash flow coverage is down, along with lower expected corporate profits, all not the best picture in the world.

The government bond market has remained strong over the past year or so, in spite of earlier thoughts that interest rates would go higher.

Over the past seven quarters going back to January 2014, the yield on the 10-year government security has varied from about 1.70 percent to about 2.5 percent.

Recently, the yield has traded in the 2.00 percent to 2.10 percent range. Most attention directed at the bond markets have been focused on the behavior of Treasury securities. Not getting much attention has been the behavior of other parts of the bond market. The news here is not that good.

Yes, corporations have continued to increase their issuance of bonds, taking advantage of the historically low rates of interest. These borrowings, however, have not gone into capital investment that would spur on economic growth, but, instead, have gone into stock buybacks, higher dividend payouts, and, increasingly, into acquisitions.

But, changes have taken place.

For example, in the past four weeks, the ratio of the yields on 10-year government debt and Moody's Aaa-rated bonds has averaged 53.3. At the beginning of August, the four-week average was 56.0.

The average yield on the 10-year government bond in the earlier period was 2.29 percent, whereas in the past four-week period, the average yield was 2.16.

The yield on the government bonds fell while the yield on Moody's Aaa bonds rose.

What happened over this time?

Well, the Federal Reserve held its short-term policy interest rate steady, as newly released statistics seemed to indicate that the economy was getting weaker and investors reduced the inflationary expectations they built into interest rates.

In other words, the yield on government bonds reflected the slower expected growth rate of the economy along with lower expectations for inflation.

What also seems to have happened during this

This article was written by

John M. Mason profile picture
John M. Mason writes on current monetary and financial events. He is the founder and CEO of New Finance, LLC. Dr. Mason has been President and CEO of two publicly traded financial institutions and the executive vice president and CFO of a third. He has also served as a special assistant to the secretary of the Department of Housing and Urban Development in Washington, D. C. and as a senior economist within the Federal Reserve System. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania and was a professor at Penn State University and taught in both the Management Division and the Engineering Division. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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