Interest Rate Roundup

Tuesday, January 23, 2007

Junk bond spreads collapse

Want to find examples of excessive risk taking and ample liquidity? No problem. It's like shooting fish in a barrel. The latest from a Bloomberg story -- the spread between yields on U.S. Treasuries and rates on high-yield corporate debt (translation: "junk bonds") has collapsed to its lowest level in years:

"The risk premium on high-yield, high- risk corporate bonds fell to the lowest in a decade as a drop in oil prices and surging consumer confidence boosts optimism the U.S. economy will grow fast enough to keep a lid on defaults.

"Investors demand an extra 2.69 percentage points in yield on average to own junk bonds instead of U.S. Treasuries, the smallest gap since 1997, according to data compiled by Merrill Lynch & Co. The spread has narrowed by a percentage point from a year ago and is below its five-year average of 5.17 percentage points, Merrill data show."

You could argue that some of the move is driven by fundamentals -- strong global growth, low default rates, and all that. But the MAIN force is ... you guessed it ... "money, money everywhere." Here's how David Darst, the chief investment strategist at Morgan Stanley Global Wealth Management described market conditions:

"There's capital out there searching for yield, and that's what has helped keep things low."

In other words, we have too much money chasing too few assets. Isn't that like "too much money, chasing too few goods?" -- the very definition of inflation? Yep. But oh yeah, asset inflation doesn't count!


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