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.


  1. Jake, this is what I passed Professor Krugman, when I was prompted by your post.

    Professor, if you want to see something REALLY striking along the lines of risk premium:

    1. Use the data from the St. Louis FRB on Baa and Aaa that go back to 1919:
    2. Subtract Aaa from Baa to get the risk premium
    3. Plot the risk premium

    As of Nov. ‘08, the Baa-Aaa risk premium moved above 3.0%, to 3.07%; in December, it was 3.38%.

    When were the last times that the Baa-Aaa risk premium rose above 3.0%? August ‘31, October ‘32, October ‘33, and March ‘38, in the depths of the Lesser Depression (first two) and its protracted recovery (last two).

    We are one year into The Greater Depression.

  2. thanks JG. this will post in the A.M.

  3. Jg, Do you mean something like this:
    BAA-AAA corp bond yield spread 1919-2008

    If you look at the FED data from 2009, the spread is going down (not plotted above).

    Let's see how it behaves as we descend to the next phase of the crisis.

    Antti K.