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Monday, January 19, 2009

Real Yields Matter

Paul Krugman comments:

The really striking thing about corporate borrowing rates isn’t that they’re high by historical standards, although they are, but the fact that they’re high even though interest rates on government debt are very, very low. Below I show the spreads on AAA and Baa debt against 30-year Treasuries: they really have spiked.

Also bear in mind the decline in expected inflation: real corporate rates are very high.
That last sentence is key. Even though Treasury rates have rallied significantly in nominal terms over the past 1 1/2 years, they still yield more in real terms than when the financial crisis began. Corporates, as Paul points out, are the greater issue. Real yields on Investment Grade Corporate Bonds are now 2.5x higher than they were just six months ago.

Throw in a declining economy and the diminished end-user demand we are witnessing across industries, and it is very easy to see why corporations are having such a difficult time.