Wednesday, February 13, 2008


The credit crisis is everywhere with the latest casualty being insurance companies holding all that junk in their portfolios. Who's next?

The following chart, taken from, shows the spread between junk bond yields and the 10-year Treasury. Note how the spread was very high when the stock market was just starting to bottom. And then note how it plummeted when the Fed started to cut rates.

The yield spread - and reward for taking on that extra credit quality risk, stayed flat and low for years as the mortgage market ballooned. Cheap credit meant squeezing more profit by taking more risk. Eventually, it catches up with you.

The chart started to rise when? Yep, last summer when the subprime crisis broke. And it looks as if the spread has a long way to go before it peaks.

Here's another view:

The black line is the 10-year Treasury bond ETF and the red is the HyGrade (junk) ETF. No end of these opposite trends in sight.

No comments: