Credit Worries Diminishes

Amid the credit crunch phenomenon, the average risk premium on high yield bonds had jumped to as high as 487 bps above treasuries in September (before the rate cut on the 18th), compared to June's record low of 263 bps. Although the current high yield spread has eased to below 400 bps, it is still well below the 20-year historic average of 540 bps. Lower spreads are generally associated with lower levels of risk aversion, which means that investors are willing to take lower returns when they risk their money. In turn, this will be good news for junk-rated companies who have been anxious to return to the debt market to borrow money.