Government vs Corporate Bond Yield

When you are considering government versus corporate bond yields, you will notice that there is a fairly stable spread between the two, with government bonds paying the smallest yields. While the extent of this spread may differ along the yield curve, the differences tend to follow a set trend for bonds of the same quality.

Ratings

Government bonds are backed by the full faith and credit of the U.S. government. These bonds are considered the safest bonds available. Corporate bonds are rated by the quality of the risk believed to be carried by a given company. In essence, the rating represents the likelihood that there will be a default by the company.

Premiums

The reason for the spread between government bonds and corporates is that there is a higher likelihood that a given company will default than that the government will. In order to compensate you for taking this additional risk, corporations must pay a risk premium. You earn a higher return by lending money to a company because the company is more likely to have an issue paying you back. There is a spread to government bonds for every quality rating. These spreads may change over time, but they tend to move more or less in tandem.

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