Comments on economics, mystery fiction, drama, and art.

Wednesday, January 21, 2009

Bond spreads

Here's an interesting piece of information--the spread between BAA and AAA bond rates, from 1919 to 2008. Note that the spikes tend to occur in severe recessions (the Great Depression, the recession of 1937/38, the 1974/75 recession, the 1980/82 recessions, and our current unpleasantness. I think the best explanation of the spikes is an increase in the risk premium during serious economic downturns. That is, it's another indication of a "flight to quality"--although how much faith we can place right now in an AAA bond rating is not so clear to me.


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