Intramarket Sector Spread
What Is an Intramarket Sector Spread?
An intramarket sector spread is the difference in yield between two fixed-income securities that have the same maturity and are inside the same market sector.
Understanding Intramarket Sector Spreads
An intramarket sector spread can also be utilized to compare relative credit ratings between companies inside the same sector. Firms giving debt with an equal term, if all else is held constant, will just show yield differences because of their credit ratings. Accordingly, intramarket sector spreads can be helpful in recognizing the creditworthiness of one company from another.
The bond market is carved into various sectors based on the issuer. Typically, these sectors are U.S. government and agency securities, corporate bonds, mortgage-and asset-backed bonds, municipal securities, and foreign bonds. These sectors can be broken down even further into market sectors and industries. Inside the corporate sector, for example, issuers can fall into one (and in some cases more) categories, for example, industrials, utilities, financials, and banks.
To illustrate this concept, a yield discrepancy between two transportation corporate bonds with the same maturity would comprise an intramarket sector spread. If at issuance, the bonds trade with an equal coupon rate (yield), and later on, a spread creates between the two bonds, the most probable reason for the difference would be a change in credit rating for one of the transportation companies.
Intramarket Sector Spread Example
Assume Company X issued a $75 million bond that is due in five years, with a 5% yield to maturity. The bond was rated A-by Standard and Poor's (S&P). At the same time, Company Y also issued a five-year, $75 million bond. Notwithstanding, it was sold with a 6% yield to maturity because the bond was rated BBB by S&P. The 1% difference in yield, in this instance, is the intramarket sector spread; the difference in yield was exclusively due to the difference in credit ratings.
Intramarket Sector Spreads versus Intermarket Sector Spreads
An intramarket sector spread is a measure of the yield spread between two bonds that are in the same market sector. This can be finished by fostering a yield curve that is similar to the Treasury yield curve, yet that instead utilizes the issuers' securities to foster the curve.
Then again, intermarket sector spreads deal with the yield spreads between two bonds in various sectors of the market. The most popular type of intermarket sector spread is a non-Treasury security compared to a comparable Treasury security. (A comparable Treasury security would be defined, in this instance, as one with the same maturity.)
Features
- Intramarket sector spreads can be valuable in distinctive the creditworthiness of one company from another.
- Intermarket sector spreads, rather than intramarket sector spreads, deal with the yield spreads between two bonds in various sectors of the market.
- An intramarket sector spread is the difference in yield between two fixed-income securities that have the same maturity, and are inside the same market sector.
