According to the Federal Reserve, the spread between the interest rate paid on Baa-rated corporate bonds and the 10-year Treasury continued to widen last week, to 311 basis points. The spread has seldom stayed above 300 basis points for very long, going back to 1962.
Over the last 10 years, the Internet bust caused a couple of such spikes.
As long as the spread continues to widen, risky assets will perform poorly. However, the abnormally high risk premia we are currently seeing indicate that longer-term investors will be paid more handsomely for accepting such risks than they have been paid on average in the past.
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This article has 1 comment:
- vodka
- 120 Comments
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Feb 21 06:44 PMwhy ? because they are paying more for credit. not a very strong correlation.
"However, the abnormally high risk premia we are currently seeing indicate that longer-term investors will be paid more handsomely for accepting such risks than they have been paid on average in the past."
i agree the spike does suggest good return opportunities in corporate debt, based on historical data. however, i am not sure why you are saying "better than the past", based on the graph it should be inline with the prior spikes, other factors excluded.