"The spread/difference, between interest rates/yields on corporate debt paper and safe Treasury securities increases when fear and risk aversion rises. The mechanism behind this is based on the idea that investors become more concerned about the return of their investments rather than the return on their investments. Risk-free Treasury securities usually have lower yields than riskier corporate bonds to reflect their lower risk of default [and both usually offer higher rates the longer the term, except when the yield curve is inverted at the peak of the business/market cycle], but when there is risk of an economic slowdown/crisis money seeks a safe haven while the 'storm' passes and so demand for Treasuries increases driving up their prices and therefore their [nominally fixed] yield falls as a proportion of their cost. While this is occurring less money is going into corporate bonds and therefore corporations, to encourage sales, raise the rates they offer. These two effects can be seen in a widening spread/difference between the yields between these two types of fixed income investments, and is used by many analysts as a way to determine the degree of fear in the market. "
Seymour@imagi-natives.com
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