The spread between US corporate bonds and ‘risk-free’ US treasuries has narrowed substantially year to date, as the credit crisis has eased. Corporate bonds’ yield premium (The premium bond investors require for the added risk of holding a corporate bond instead of a US government security) is now all the way back to pre-Lehman levels.
Have bond markets become too complacent?
While clearly bond investors have become much more willing to accept risk, the answer is no.
This is becasue bond premiums, while lower, aren’t yet back to pre-Bear Stearns levels. Thus bond markets have merely gone from a level of panic to one of caution, rather than all the way to complacency. Actually, the trend above shows that the corporate bond market’s health has improved substantially from where it was not too long ago. If this continues further and premiums fall back to pre-Bear Stearns levels then we can worry, but we’re still far from that point.
Notably, for stocks, the Volatility Index (VIX) paints a similar picture as the bond chart above. The VIX has also come down substantially this year and is now at pre-Lehman levels. Yet it is still above where it was pre-Bear Stearns as well.
Hence these two measures of perceived risk confirm each other.
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