Question

In the period of the 2007 Financial Crisis, what factors impact  interest rate spread on Baa Corporate Bonds versus Default Free US Treasury Bonds?

Answer 1

if the Fed increases rates to slow down the economy and keep inflation in check, as it did in the early 1980s, bond prices fall and yields rise. State and local government bond performance during recessions has tracked that of Treasuries, with the exception of the 2007-2009 recession. The 2008 financial crisis created fears that even some state and local government bond issuers may not be able to meet their debt obligations, which led to a temporary flight of investments from state and local bonds into Treasuries.

Corporate bonds are riskier than government bonds. Ratings agencies, such as Moody's and Standard and Poor's, assign ratings to all corporate bonds. Bonds with higher ratings, such as "Aaa," usually indicate a lower risk of default than bonds with lower ratings, such as "C." Riskier bonds yield more because bond issuers have to pay a higher interest rate to attract investors. The FRED graphs show that high-grade corporate bond yields usually fall during recessions while low-grade corporate bond yields generally increase.