Alternate title: Irrational exuberance – the sequel.
Former Federal Reserve chairman Alan Greenspan is offering his explanation of the financial meltdown in a paper to be presented at the Brookings Institute on Friday.
In it the erstwhile central banker makes this comment:
Our broadest measure of credit risk, the spread of yields on CCC, or lower, bonds (against 10- year U.S. Treasury bonds) fell to a probable record low in the spring of 2007, though only marginally so (exhibit 6). Almost all market participants of my acquaintance were aware of the growing risks, but also cognizant that risk had often remained underpriced for years.
And here’s the accompanying exhibit:
Here’s another way of looking at that data.
From Bloomberg, the spread between Bank of America Merrill Lynch’s high-yield index and 10-year US Treasuries, between 2002 and March 2010. Click to enlarge:
The difference between the two — essentially the premium investors demand for holding `risky’ assets over US government bonds — is currently about 5.08. Which means it’s beginning to veer very close to the ultra mispriced days of spring 2007. It’s obscured on the chart, but the 2007 low was circa 2.88.
The median figure for the whole eight-year period, is about 4.9.
Some analysts are calling for the spread to narrow to 4.0 by the end of 2010.
And that’s despite the whole financial crisis thing.
Related links:
Greenspan says, je regrette quelque chose – FT Alphaville
Does monetary policy affect bank risk-taking? - BIS paper
Junk bonds pull ahead . . . – Bloomberg
Bankers fear for high-yield rally – FT