Baa/Treasury Spread Continues to Widen
I often take the pulse of risk tolerance by looking at the corporate/treasury risk premium, which is calculated on a daily, weekly and monthly basis by the Federal Reserve. (Specifically, I compare the Baa Corporate bond rate to the 10 year Treasury Constant Maturity.)A lower spread is positive for the economy and for corporate earnings, as it means companies don’t have to pay as much (relative to riskless treasuries) to borrow money that can then be invested in profitable opportunities. In effect, it lowers the bar as to what makes for a worthwhile investment. A low spread has a mixed message for stock market investing - good for earnings/economy per above, but means investors are being paid less to take risks.
The current spread is nearly as high as that of the 1998 Russia/LTCM crisis. The truly big investing opportunities (the telecom bust, the 1987 crash) usually offer spreads above 300 basis points.
Note:
Make sure to look over the credit card offers that come in the mail for the best card deal!
