Looking at Long-Term Credit Spreads

If you’re confused by the credit crunch that happened last summer, here’s a good graph showing you some of the details. This chart shows the spread between Moody’s AAA Corporate yield index and the 10-year Treasury yield.
Since lending to the government is pretty low risk, they own the printing press after all, the lower the spread signifies greater confidence the free market has in corporations paying back their loans. When the difference widens, that signifies that investors have become much more afraid of loaning to corporations. In other words, they’ve become more afraid of taking risks.
In mid-July, the spread was around 70 basis points, which was close to some of the lowest levels in the past 15 years. Then, very suddenly, the spread exploded to over 120 basis points in less than one month.
While the spread is still wide compared with last summer, it’s still moderate compared with the long-term. Consider that after 9/11, it ballooned to over 260 basis points. Looking at last ten years, the current spread is within the lowest 37th percentile.

Posted by Eddy Elfenbein on September 24th, 2007 at 10:06 am

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