Comparing Corporate Bonds to Treasuries
Okay, this is a dumb question if you're already a trader at a bank or buy-side shop. But here we go:
I know that corporate bonds are often quoted against treasuries with a spread. So T+250 for example. Say, I'm looking at Apple's 30-year semi-annual coupon-paying bond maturing in 7 years, which treasury security would I look at when comparing,
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would it be an "off-the-run" 30-year treasury bond with a maturity of 7 years?
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would it be an "on-the-run" 7-Year Treasury note?
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or either?
Thank you for being patient with this dumb question from an undergrad!
When comparing corporate bonds to Treasuries, especially in terms of spreads like T+250, the focus is typically on matching the maturity profiles of the securities being compared. In the case of Apple's 30-year bond that matures in 7 years, you're essentially looking for a Treasury security that aligns with the remaining maturity of the corporate bond to accurately assess the spread. Here's a breakdown:
"Off-the-run" 30-year Treasury bond with a maturity of 7 years: This option might seem intuitive because the original issuance was a 30-year bond, similar to Apple's. However, "off-the-run" Treasuries are not the most liquid or the benchmark securities. They are older issues and might not provide the most accurate or relevant comparison for current market conditions.
"On-the-run" 7-Year Treasury note: This is the more appropriate choice. "On-the-run" Treasuries are the most recent issues of a particular maturity and are the most liquid. They serve as benchmarks for their respective maturities. Since you're interested in comparing the spread for a bond that matures in 7 years, an "on-the-run" 7-Year Treasury note would provide a more accurate and relevant comparison. It reflects the current market conditions and investor sentiment more closely for that specific maturity horizon.
Or either?: While technically you could look at either for a broad understanding, for precision and relevance in market analysis, the "on-the-run" 7-Year Treasury note is the preferred choice. It offers a clearer, more current benchmark for comparison.
Your question is far from dumb; understanding these nuances is crucial for anyone looking to work in finance, especially in trading or investment roles. It's important to grasp how different securities are compared and what benchmarks are most relevant for accurate analysis.
Sources: Help Me Understand Fixed Income Investing, Factors that affect 10yr and 2yr treasury yield, https://www.wallstreetoasis.com/forum/investing/solving-a-crazy-problem-the-daily-peel-52223?customgpt=1, Two Bonds w/ Different Maturities but Same Price / Face. Which has higher yield?, Understanding what the treasury markets are really saying
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