High Yield Corporate Spreads Not Yet at Great Depression Levels

Here’s a fascinating look at corporate bond yields over the past 90 years. I got the data off the Federal Reserve Bank of St. Louis’ data bank. This chart shows the yields of Moody’s index of Aaa and Baa seasoned corporate bond yields.

You’ll notice that the gap has widened significantly. This signifies what we already know, that lenders have become extremely risk-averse. Here’s a look at the difference between the two yields:

The premium for high-quality lenders is as high as it’s been since the recession of the early 1980s. We’re still a long way from the spreads we had during the Great Depression.

Comments

[tvb:]

2 glaring problems:

1.) Your chart show yields not spreads. Spreads are the difference between risk-free rates (Treasuries) and corporate bonds and are the relevant metric to consider when evaluating risk-premiums for high-yield bonds. A lot of the large yield movements you see in your chart are largely driven by moments in Treasury/risk-free rates (which were in the teens in the early 80's) and NOT not spreads.

2.) High-yield bonds are considered those rated Ba1/BB+ and below and your graph shows yields of investment grade bonds.

2008 Nov 14 11:31 AM

[jepittman:]

There is also the issue of inflation. The data do not adjust for it. It would be interesting to see the chart inflation adjusted and adding the 'junk' bonds and treasuries.

2008 Nov 14 01:01 PM

[jswede:]

inflation is essentially (theoretically anyway) in the UST rates --- showing spreads over UST would give a good comparison.

Assuming chart is of the 10yr maturity:

10yr UST was ~11.5% in '83, meaning that AAA spreads were approx +300 then, and BBB was approx +550.

Today, the 10yr composite AAA yield is ~6.75% -- that's +302 over the 10yr UST currently at 3.73%. BBB yields are over 10% today, giving approx +625 spread.

During the depression, USTs did not exist. The closest benchmark would be railroad bonds - those averaged 3-4% during the 1st half of the century, and I'd guess that those are what the "AAA" curve are tracking during that time in the chart.

Using the AAA (railroad bonds) as the benchmark, the BBB spread was then about +550 at its peak during the Great Depression.

As mentioned above, neither index is high yield, both AAA and BBB are investment grade.

2008 Nov 14 01:32 PM

[jswede:]

just visited the author's site. nowhere does he mention "High Yield" -- those brilliant SA editors added that. Also he has spread charts there.

This SA "re-post" does not do the author any favors. Try his link for a much better, if not entirely accurate, post.

2008 Nov 14 01:37 PM

[Larry Wasse...:]

Who's writing this stuff, Paulson? This is about as helpful as cracking open a fortune cookie. If you want to try to peer into the future of the financial markets just follow unemployment anbd the rate of inflation. If unemployment continues to rise stocks will go down and spreads on bonds will widen. Unemployment is rising. Inflation is weakening because unemployment is gaining. What you can debate is how much the October stock market crash will affect the psyche of the consumer. If the consumer has been injured emotionally by his loss of paper wealth but is still fundamentally solvent unemployment will rise to 7 or 8 percent, inflation will in turn be dampened and one day people will wake up and see a really cheap stock market and start to buy in -- sending it up and startng a repairative process. If the consumer, like many banks, is FUNDAMENTALLY insolvent due to excessive use of leverage from Greenspan's 1 percent interest rates and disdain for regulation, and since the banks can't lend, then we're in for a downward spiral much like the 1930's which all out government policy can only amerliorate -- not fix.
Welcome too the consequence of Alan Greensopan's unparalled hubris and the learning disabled lack of policy of George W. Bush who was busy guarding mid east oil for the last 8 years. And while turning his back to all spects of domestic oversight, still couldn't find one very tall and distinct looking guy with renal failure -- Osama Bin Laden.

2008 Nov 16 02:53 PM