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We make mention of the following companies: Altria (MO), Biogen Idec (BIIB), CSX Corp. (CSX), Exxon (XOM), Johnson & Johnson (JNJ) and General Electric (GE).

Below are two graphs tracking the behavior of different long-term interest rates over time -- now vs. the late 1920s and early '30's. Changes in the spreads between bonds of similar durations are due to the market's perception of the relative likelihood of default, from securities with very-little-or-no-probability of default like Treasuries having lower yields to things like junk bonds with a high likelihood of default.

Since the long-term government securities is a discontinued series, and the 20-year constant maturity series does not go back that far, the comparisons are not exact, but are reasonably close. This is monthly data for both time periods (only data available for the 1930's).

If daily values were shown (or when the next monthly data point is posted) the current spreads would be even wider, as Treasury yields have plunged across the curve. Note that during the earlier period, the spread between Treasury yields and the highest quality corporate yields did not change that much over the whole period. Lower-quality corporate spreads stayed relatively stable for more than a year after the 1929 crash, and then opened very wide.

For example, in May of 1930, the spread between Treasury securities and Baa corporates was 2.41% -- not that much wider than the 2.16% that prevailed a year earlier, before the crash. The AAA spread to Treasuries widened to 1.29% in May 1930 from 0.93% a year earlier. However, by 1932, when stuff was really hitting the fan, the Baa spread had widened out to 7.24%, while the AAA spread had only widened to 1.60%.

Keep in mind that Baa is not junk -- it is still considered investment grade, just not corporate royalty like AAA. Examples of Baa issuers would be Altria (MO), Biogen Idec (BIIB) and CSX Corp. (CSX).

Most Electric Utilities are rated Baa. AAA-rated issuers are rare, but current examples would include Exxon (XOM), Johnson & Johnson (JNJ) and General Electric (GE).

So how does that compare to our more recent experience? Well, to take May of 2007 as a baseline, the Baa spread was then 1.41% and the AAA spread was just 0.49% -- in other words even narrower than way back in history (although the slightly different data series could explain that). By May of 2008, Bear Stearns had already fallen, and there were clear indications that there was something rotting on the balance sheets of the banks.

Yet, so many of the talking heads on cable TV and government officials were claiming that things were 'contained.' There had been some widening of spreads, to 0.97% in the case of AAA, and 2.33% for Baa. In other words, spreads were roughly where they were in May of 1929.

The last data point on the graph, well after the demise of Lehman Brothers, puts the AAA spread at 1.88% and the Baa spread at 4.95%. The daily spreads on 12/17 were 1.93% and 5.21%. Junk bond rates are not available (or at least I don't have them handy) back in the 1930's, but recently have been over 20% as measured by the FINRA-Bloomberg corporate bond index.

Draw your own conclusions:

Recent History

Ancient History

Read the full analyst report on MO.

Read the full analyst report on BIIB.

Read the full analyst report on CSX.

Read the full analyst report on XOM.

Read the full analyst report on JNJ.

Read the full analyst report on GE.

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Interest Rate Spreads: Then & Now

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