Tuesday, June 29, 2010
This chart shows the average yield on BAA corporate bonds over the past 5 years. The latest datapoint is 6.15% (as of June 28th), which is almost the lowest reading on the chart. Corporate bond yields spiked during the recession, when fear of massive corporate defaults was intense and it was difficult if not impossible for just about anyone to obtain credit. Spreads (the difference between corporate and Treasury yields) are about 100 bps wider today than they were in the tranquil 2005-2006 period, mainly because Treasury yields have collapsed. Borrowing costs for the typical large corporation have not risen at all in five years, but the widening of spreads indicates that expected default rates are much higher. It's not that there is a shortage of money in the system today, it's that fears of losses are still running fairly high. The market seems more preoccupied by fear than by reality.
Posted by Scott Grannis at 11:47 AM