JasonC

Silver Linings: Allure and Risk

Remember, those are the amounts *above* what a treasury bond of the same maturity, is yielding. With 10 years at 3.75% or so, a 4% spread means 10 year debt is available at 7.75%.

As for what future credit losses will be, the past is some guide though not a perfect one. You can simulate the losses on bonds of a given rating using the downgrade and default chances per year Moody's publishes. BBB rated can have credit losses in the 0.5 to 1% a year range, but not in the 4% a year range. Meanwhile As can be bought today for spreads not much less than that, with 0.5% historical credit losses, or less.

In the unfavored sectors it gets even more extreme. Real estate names, add a percent. Banks, add a percent. Regional banks smaller than the top tier, add another percent or two. A rated regionals are trading like single B junk, as though a third will default within 5 years. And unless the banking system collapses, that's nuts.

5 years from now this crisis will be a memory, and spreads will be normal. A few companies will have blown up in the meantime, to be sure. But these spreads cover a multitude of such problems, as will appreciate from spread contraction on all the bonds still paying, when things return to normal.