Monday, March 9, 2009

Risk premia are way up

In September, Corporate borrowing costs have skyrocketed relative to Treasuries. The graph measures the spread of coporate borrowiing over Treasuries with the pre-payment risk removed from series. This is called the Option Adjusted Spread.


  1. It's not just the spread between corporates and treasuries. The spread between AAA and BAA rates is at an historic high, an average of 308 basis boints in 2009 (the average for the 1962-2009 period is 101 basis points).

  2. The same thing is happening with regular bank debt. ABLs that used to get a 50-100bpt spread over LIBOR are now at 350, with rate floors... Buffet may be right when he said that the banks may very well "earn their way" out of their terrible capital positions.