So Long Risk Premium

Bloomberg reports that long-term government bonds have outperformed the stock market over the last 30 years. The article quotes Douglas Cliggott, “Over the last 30 years there’s been no risk premium.”
Technically, the most common reference to the risk premium is stocks versus short-term T-bills. The problem is that the market isn’t that cheap when looking at long-term corporate yields (it’s not expensive either). What’s happened is that the spread between government and corporate debt has widened pretty dramatically.

The graph above shows the 10-year yield versus BAA debt. Clearly, folks have moved strongly away from risky assets. It’s not so much that the risk premium is gone, it’s that we’re in a T-bond bubble.

Posted by Eddy Elfenbein on March 12th, 2009 at 11:33 am

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