Credit spread update

To back up my comments in the previous post, I offer this updated chart of option-adjusted spreads on investment-grade corporate bonds. Note that while spreads have literally collapsed from their year-end, all-time highs, they are have not yet declined below the peak levels reached in late 2002 at the height of the corporate bond market panic. At the time (October 2002), the market was terrified that the bankruptcy of Enron and WorldCom were harbingers of massive corporate defaults yet to come. Spreads reached levels then that were the highest seen since the Depression.

So the market feels a lot better today than it did at the end of last year. But by the standards of the recent past, the market is still priced to conditions that were considered terrifying.