Bob Murphy looks at bond spreads:

The above chart doesn’t look to me like investors around the world have rushed into safe assets, and that’s why (incidentally) yields on Treasuries are so low. (If that’s what were going on, wouldn’t the spread between AAA and BAA be bigger now than it was in 2007?) It also doesn’t look to me like there’s a glut of desired saving that can’t clear because of the 0% lower bound. (If that were the case, wouldn’t corporate yields be at least a few points lower now than in 2007?)

So a couple of things. First Moody’s Seasoned is an index of bonds with a roughly 30 year maturity. So you would do better to compare Moody’s Seasoned to 30 year Treasuries or 3-Month Treasuries to Commercial Paper. We will do both.

Here is Seasoned vs 30 UST

FRED Graph

You can easily see the flight to quality in late 2008 with all spreads going higher. Then you see a tightening of spreads after TARP. And no you have pretty solid co-movement.

We can look at commercial paper as well. Like 90 day T-bills they have very short maturation.


FRED Graph

I don’t have easy access t non-AA commercial paper but we can compare financial paper with non-financial paper. It was financial paper that was under the most stress during the crisis as it was used to leverage up brokerage houses such as Lehman Brothers.

Again you can see the exploding spreads in late 2008 and their subsequent calm down.

So that’s comparing apples to apples.

From a bigger picture the explosion in spread that you see in Bob’s blue graph above is a story about the yield curve, not about public vs. private bonds.

Short term maturities collapsed while long term drifted down. This is because at present no one believes that low interest rates will last forever. Eventually the economy will recovery and the Fed will raise rates.

Incidentally I think this is evidence that the market is indeed not fooled by Fed action. Bond traders now that cheap money now does not mean cheap money forever and hence long bonds do not yield much lower than they did during the end of the boom.