Treasury Bonds vs Corporate Bonds (2026): Credit Spread Math

The credit spread is the whole story

A corporate bond yields more than a Treasury of the same maturity because the corporation could default; the Treasury cannot. The yield difference is the "credit spread." On September 24, 2026 it was about 0.67 point for A-rated, 0.97 for BBB, 1.64 for BB and 2.86 for single-B (ICE BofA option-adjusted spreads, via FRED). Whether that compensation is adequate depends on default probability, recovery rate, and duration.

Why corporate spreads exist

Corporate bonds carry default risk: the issuer might miss a coupon or fail to repay principal. Historical default rates:

• Investment grade (AAA-BBB): Annual default rate 0.02-0.30%. Cumulative 10-year default rate 0.5-3%.
• High-yield (BB-B): Annual default rate 1-5%. Cumulative 10-year default rate 15-35%.
• Distressed (CCC and below): Annual default rate 15-30%. Most issues don't survive 5 years.

Recovery rates on defaulted bonds average 40-65 cents on the dollar (senior unsecured corporate debt). So default loss = default rate × (1 minus recovery rate) = approximately 60% of face value on average.

State-tax dimension

Treasury interest is state-tax exempt under 31 U.S.C. §3124. Corporate bond interest is fully state-taxable. For a California resident in the 10.3% bracket, this is worth roughly 50 bps of after-tax yield on the 5.17% 10-year Treasury (September 25, 2026) vs an equivalently-yielding corporate.

For a CA resident comparing the 5.17% 10-year Treasury to the 5.76% A-rated corporate index yield (September 24-25, 2026):

• Treasury after-tax yield: 5.17% × (1-0.37) = 3.26%
• Corporate after-tax yield: 5.76% × (1-0.473) = 3.04%

The roughly 60 bp headline pickup turns into a 22 bp Treasury advantage after tax. Add in default-risk expected loss (~5 bp annual on A-rated) and the Treasury wins on a risk-adjusted basis for CA residents.

When corporates make sense

• Inside IRA wrappers. State tax doesn't matter; the credit spread becomes pure premium.
• Diversified ETF exposure (LQD, AGG, VCIT). Diversification eliminates single-issuer default risk. Annual expense 4-15 bps. Better than picking individual issues for most investors.
• High-conviction credit views. If you have an information edge on a specific issuer's credit quality, individual corporate bonds can pay off. Most retail investors don't have this edge.
• Yield maximization in no-state-tax environments. Florida, Texas residents lose the Treasury's state-tax advantage; corporate spreads become more attractive.
• Hold-to-maturity, sub-AA rated, IRA-wrapped. Default risk is real but small at investment-grade; the spread compensates over hold periods.

When Treasuries beat corporates

• Taxable account, high-tax state. State-tax exemption alone closes most of the spread gap.
• Risk-off portfolio core. Treasuries don't widen in spread when markets get stressed. Corporates do.
• Liquidity-critical positions. Treasuries trade with tiny bid-ask spreads even in market stress. Corporate bond liquidity dries up in any volatility.
• Above $250K in single-issuer corporates. Concentration risk on one corporate name is meaningful; one Treasury position of any size is fine.
• Retirement income flooring. Default risk is intolerable for income-flooring tier. Use Treasuries (or MYGAs/SPIAs) here.

The MYGA layer

MYGAs sit between Treasuries and corporates in risk-yield space. An A-rated 5-year MYGA at about 5.50-6.05% (public carrier rate sheets, October 14, 2026) pays:

• About +82 to +102 bps over the 5-year Treasury (4.98%), a bit above the A-rated corporate index spread
• State-guaranty backed (functionally similar to investment-grade safety, but state-by-state coverage limits)
• Tax-deferred (advantage corporates don't have)

For taxable retirement money in the 3-10 year horizon, MYGAs often dominate both Treasuries (yield premium) and corporates (tax deferral) on a risk-adjusted after-tax basis. Inside IRAs, the comparison is more competitive because tax-deferred wrappers neutralize MYGA's deferral advantage.

Worked example: $250K, 10 years, CA top bracket

10-year Treasury at 5.17% (September 25, 2026)

After-tax annual: $8,143. 10-year total: $81,430.

A-rated corporate bond at 5.76% (index yield, September 24, 2026)

• Annual pre-tax: $14,400
• Federal+state (47.3% combined): $6,811
• After-tax annual: $7,589
• 10-year total before expected default loss: $75,890
• Expected default loss (5 bps annual on A-rated): ~$125/year = $1,250 over 10 years
• Net 10-year after-tax: $74,640

The Treasury beats the A-rated corporate by about $6,800 after tax and expected default loss, with substantially better liquidity. Treasury wins for CA residents.

MYGA: two back-to-back 5-year terms at an assumed 5.90%

Assumes the mid-range A-rated 5-year rate of September 24, 2026 and a renewal at the same rate (renewal rates are not guaranteed). $250K grows to about $443,400 in 10 years, tax-deferred; after 47.3% combined tax at withdrawal the net gain is about $101,900.

On those assumptions the MYGA wins by roughly $20,000 over the Treasury and $27,000 over the corporate for taxable retirement money.

FAQ

Are corporate bond ETFs safer than individual corporates?

Yes. Diversification eliminates single-issuer risk. A 5,000-bond ETF like AGG or LQD essentially eliminates default risk at the portfolio level. Expense ratio 4-15 bps is well worth it.

What's the difference between investment-grade and high-yield?

Investment-grade = AAA/AA/A/BBB ratings. Generally low default risk (cumulative 10yr default rate under 3%). High-yield = BB/B/CCC. Materially higher default risk (10-30%+ cumulative).

Are munis better than corporates for high-tax-state residents?

Often yes. In-state municipal bonds are double-tax-exempt (federal AND state-exempt for residents of the issuing state). For CA, NY, NJ residents in high brackets, munis can match corporate yields after tax with significantly lower default risk.

What's a corporate bond's credit spread?

The yield difference between the corporate and a Treasury of the same maturity. Wider spreads = market pricing more default risk. Spreads compress in risk-on markets, widen in risk-off.

Do corporate bonds have call risk?

Often yes. Many corporates are callable, meaning the issuer can redeem early if rates fall. This caps your upside on rate moves. Treasuries are non-callable. Read the specific bond's call schedule before buying.

How do corporate bond ratings work?

Moody's (Aaa-C), S&P/Fitch (AAA-D). Investment grade is BBB-/Baa3 and above; below is high-yield ('junk'). Ratings can change during the bond's life. Downgrades depress price even if default doesn't occur.

Are MYGAs equivalent to BBB corporate bonds?

Risk-profile-wise, MYGAs from A-rated carriers are typically considered safer than BBB corporates due to state guaranty fund backing and conservative carrier investment portfolios. Yield-wise, MYGAs often pay more than BBBs.

Why don't more retirees buy corporate bonds?

Three reasons: (1) state-tax friction in high-tax states erodes the spread; (2) default-risk anxiety; (3) for taxable retirement money, MYGAs often deliver better after-tax economics with state-guaranty safety.

Related reading

• Treasury laddering
• 10-year Treasury vs MYGA
• 30-year Treasury review
• State tax on Treasury interest
• Best MYGA Rates 2026

Corporates earn the credit spread. MYGAs match it without the default risk.

Hans Goldstein, independent licensed insurance producer.

If you're considering corporate bonds for the yield premium over Treasuries, MYGAs from A-rated carriers usually pay a similar spread with state-guaranty backing and full tax deferral. Worth seeing the comparison at your state bracket before allocating.

Send your details and within one business day you'll get a written side-by-side: the Treasury option vs. the top 3 MYGAs from A-rated carriers at the same term, end-of-term math at your actual dollar amount, and after-tax yield computed at your state bracket. We’ll email it to you.

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Hans Goldstein · 213-414-2808 · NPN 20602398, independent licensed insurance producer appointed with multiple A-rated carriers

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Disclosure

This review reflects publicly available Treasury auction results, TreasuryDirect documentation, and approximate market yields as of the date stated above. Treasury yields change daily; current yields differ from prior auctions and may differ from those shown here. This article is general information for educational purposes; it is not a personalized recommendation, solicitation, or offer of any specific security or insurance product. U.S. Treasury securities are backed by the full faith and credit of the United States Government. MYGA references compare Treasury yields against approximate rates from A-rated insurance carriers as of the date stated; carrier rates change monthly. State guaranty fund coverage on annuities is provided by the state insurance department and varies by state (typically $250,000-$300,000 per owner per carrier). Hans Goldstein is an independent licensed insurance producer (NPN 20602398) appointed with multiple A-rated annuity carriers; he is NOT a registered investment advisor, broker-dealer, or registered representative, and is not paid by the U.S. Treasury, TreasuryDirect, or any brokerage for this review. No compensation has been received from any third party in connection with this content. Always read the actual offering documents and consult a licensed advisor before purchasing any security or annuity. Tax discussion of 31 U.S.C. §3124 and Internal Revenue Code provisions reflects law as of 2026 and is subject to change.