For several years, in response to the terrifying ongoing international economic crisis, the Federal Reserve Board, European Central Bank, and many other key central banks have played Santa Claus to the global economy in general and debtors (borrowers) in particular. Suppose marketplace stargazers scan the constellation of accommodative Fed policies. These include the blessings of ground level interest rates (Federal Funds) and three sparkling rounds of money printing. The Fed joyously promises to continue offering its bountiful gifts for quite some time!
Not to be outdone, American and other politicians chattering and sometimes laboring in their workshops, engage in massive deficit spending designed to launch and preserve economic recovery.
In any event, the UST 10 year note established a major bottom several months ago, at 1.38 percent on 7/25/12. Note that on 12/12/12 the beneficent Federal Reserve not only reaffirmed its two percent long run inflation target, but also indicated it would tolerate inflation projections of 2.5pc for up to two years ahead. Ascending UST rates suggest that the US corporate realm likewise in general will have higher rates.
Take Moody’s Baa index of bonds as a benchmark for US lower quality corporate bonds, yet nevertheless “investment grade”.
Based upon this Baa corporate signpost, US lower quality corporate bond rates have been creeping up lately. They probably established a very significant trough around 4.5 percent in November 2012, or will do so soon. Using daily data (and the extra decimal point) that bottom was 4.42 percent on 11/8/12 (12/18/12 close 4.76pc).
In the US credit arena nowadays, a widening yield spread between lower quality corporate debt and UST might reflect that the hunt for better yields beyond the UST field probably has reached an end.