Your Credit Risk Chart of the Day

Here’s an interesting chart. This shows the yield spread between AAA corporate bonds and BAA bonds.

Normally, BAA bonds yield about 1% more than AAA for the added risk. Sometimes this goes as low as 0.5% and sometimes it goes as high as 1.5%.

During the credit crisis, however, all hell broke loose. By December 2008, the spread reached 350 basis points.

In other words, everybody was terrified to lend to anyone, unless they were of the lowest credit risk. As bad as the chart looks, the spread fell back to the normal range by the summer of 2009.

We even broke below 1% during the early part of this year. The spread jumped up to 1.4% due to fears about Europe, but that, too, has subsided. I wouldn’t be surprised to see us break below 1% again before the year is over.

The message is that the worst of the financial crisis is behind us. We’re now dealing with the damage leftover in the form of very high unemployment.

Posted by on October 14th, 2010 at 12:21 pm


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