Friday, November 14, 2008

Yield Spreads point to bad economic times ahead

In good times even the majority of low rated firms can make their debt payments, but in bad times these low rated firms are the first to get in trouble. Investors know this and the spread between low rated and high rated debt gets larger when the economy slows.

Thus, it is more than a little troubling that the risk premium has grown to historic levels. From Barron's:

Current Yield -
"THE STOCK MARKET IS PRICED FOR a recession, but the bond market is priced for a depression. So says Rob Arnott, the brainiac who heads Research Affiliates, an institutional advisory.

That's not hyperbole. Corporate bonds rated Baa or triple-B, the low end of investment grade by Moody's and Standard & Poor's designations, offer the biggest yield premium since the early 1930s, notes RBC Capital Markets.

That's a problem for pulling the economy out of the credit crisis, but an opportunity for investors."

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