Thursday, May 21, 2009
Financial Credit Spreads -- Back From The Brink Far From Normal
The above chart from Bloomberg compares the yield on a Goldman Sachs note -- 5.5% due 11/15/2014 with a generic 5-year Treasury.
Before the financial world imploded, the spread between the two was generally inside of 80bps. As things went from bad to worse the spread widened and seemed to be topping out at around 300bps until Lehman's bankruptcy shot the spread out to 855bp and the spread has been narrowing ever since. Narrowing but at 330bps, the pre-Lehman levels, and that seems to be about it.
Investors have obviosuly pulled back from an Armaggedon outlook to something a bit more routine, like a recession. Another way to look at this is that the financial system may now be relatively solvent but the system's exposure to the nonfinancial sector is keeping a few people from getting a good night's sleep.