More evidence pointing to the ineffectiveness of those Federal rate cuts.The yield on US high quality corporate bonds (rated Aaa by Moodys) has remained largely unchanged over the last year or so. It has fluctuated between 5 and 6 percent; peaking during the Lehman crisis and declining afterwards. Ominously, it has begun to creep up over the last two months.
What is the implication of stubbornly high yields? Recent Federal reserve rate cuts have not fed through to the corporate debt market. High corporate bond rates make it difficult for firms to invest and expand, which puts a brake on economic growth and job creation.
The Fed may cut rates, but financial markets are not responding.
Rising default risk - the GM and GE effect.
ReplyDeleteI guess credit ratings do not accurately depict risk. I suspect that if you took a random selection of AAA rated bonds, the risk of default would range from very low to medium. The market is therefore dong what it can to demonstrate such risks.
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