Monday, July 27, 2009
Investment-grade corporate bond spreads are back to the previous recession's wides.
The chart illustrates the Barclays Capital corporate bond index. It suggests that the spreads are an average of 272 bps above comparable Treasuries. As corporate bond issuance tightens slightly, this allows businesses to finance new investment at more reasonable, non credit crisis, rates.
But notice that they are still wide, and there is likely still some tightening left to go. However, with default rates still rising, it is unlikely that this index reaches its historic lows of 98 bps spanning 2004-2007 anytime soon. Happy days in the bond market are over for a while, especially with government debt on the rise.
As a further note, notice how spreads continued to widen following the 2001 recession. And in contrast, spreads tightened before the end of the 1990-1991 recession. Every cycle is different.