Frazzled by the sudden appearance of Financial Crisis 2, the Fed scurries in every bailout direction.
By Wolf Richter for WOLF STREET:
Corporate bonds have come under serious stress, starting on February 24 and building in a crescendo over the past 10 or so trading days. During this sell-off, credit-risk concerns are suddenly shooting to the top, as bond prices are dropping, and yields are surging. Financial stress is spreading. This turmoil makes it more difficult and more expensive for companies to raise funds by issuing new bonds.
And yield spreads have blown out. The spread is the difference between the yield of a corporate bond and the yield of a Treasury security of equivalent maturity. This way, the spread measures credit-risk concerns, as Treasury securities are assumed to be nearly free of “credit risk,” since the Fed’s printing press can always print the US out of a default.
These credit-risk concerns have blown out suddenly.
The average spread of bonds rated BBB widened to 3.68 percentage points as of last night (ICE BofA US BBB Effective Yield Index). BBB is the enormous and ballooning $3.3-trillion category of “investment-grade” bonds just above “junk” that everyone is fretting about. And this spread of 3.68 percentage points is the magic number that the index blew through on September 15, 2008, the day Lehman Brothers filed for bankruptcy:
Everyone is fretting about the BBB category of bonds because it’s so huge – it accounted for about half of all investment grade bonds – and because many of these bonds are going to be downgraded to junk during a downturn. So here we are…