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Thursday, November 20, 2008

The Equity Market has Nothing on Credit

Paul Krugman says:

Don't panic about the stock market...
Panic about the credit markets instead. Interest rate on 3-month Treasuries at 0.02%; interest rate on high-yield (junk) bonds over 20%.

This is an economic emergency.

It is unbelievable to me how quickly things have changed. The willingness of an investor to move from a AAA Government Backed Treasury Bill with 90 days to maturity, to a below investment grade (i.e. formerly known as "junk") bond with additional interest rate risk (i.e. more duration) was priced at just over 2.5% per year all the way back in the Spring of 2007 (i.e. 5 lifetimes ago).

At 20%+ interest rate levels, this pretty much knocks out any expected return on equity for most corporations. I have to go with Paul on this... equities still seem priced at high relative (to credit) levels.