A story in today's Wall Street Journal suggests yet another bogeyman for investors to fear: the widening spread in yields between corporate bonds and to the 10-year Treasury.
After bottoming at about 220 basis points last year, the yield spread between the typical Baa-rated corporate bond and the 10-year treasury has since widened to 320 bp. Supposedly, this widening is a harbinger of economic problems because it signals "that investors are less confident about companies' business prospects and financial health."
As usual a look at some history helps clarify matters. As the chart above shows, although the yield spread has widened, it has merely returned to where it was in 2010-12. In other words, the US has been through these "risk off" periods before without any real economic problems. This is nothing out of the ordinary for the Plow Horse recovery. We would need to see a much higher yield spread before we would consider this a truly worrisome condition.
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Posted on Monday, September 28, 2015 @ 3:18 PM
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