Spreads and Recession

What happens to spreads during a recession ? Do they widen ? I can’t seem to wrap my head around this . I realise that during a recession there is a higher chance of default and the prices of corporates will decline as a result, but at the same time won’t lower interest rates increase the prices ??

They are super wide right now. Around 600 basis points - corporates over treasuries. The interest rates would affect both the treasuries and the corps. You have to look at it on a relative basis. The spread would mainly reflect default risk.

Spreads widen in recession because high yield instruments are at more risk then good corporates and treasuries. The lower interest rates benefit all the bonds, so they wont have effect on spreads. Spreads are differences in yields. Hope this helps. :slight_smile:

Rudeboi Wrote: ------------------------------------------------------- > What happens to spreads during a recession ? Do > they widen ? I can’t seem to wrap my head around > this . > I realise that during a recession there is a > higher chance of default and the prices of > corporates will decline as a result, but at the > same time won’t lower interest rates increase the > prices ?? Let’s say two years ago a friend of yours bought a corporate bond from AIG. He gets $100 every 6 months and the bond expires in 10 years (face vallue of $1,000). Since then as we started getting into recession, the Fed started lowering interest rates. But the reality is that you don’t care as much about Treasuries as you care about AIG staying in business. How much would you pay for that bond today? More or less than you would’ve 2 years ago? Probably less -> spread widen during recessions because of credit risk (as mwvt and GetSetGo pointed out).

So it wd be wise to sell out of high yield corporates and into treasuries if a recession is forecasted ? A flight to quality of sorts .

Yes.

interest rates affect all but credit risk increases creating a widening of the spreads