Mar
23rd
Tue
23rd
Risk-Free in the New Normal
In the new normal, high-quality corporate bonds may yield less than government bonds:
Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.
Investors will get used to the fact that government yield does not equal “risk-free rate” anymore, but embeds a credit risk (the risk of default - directly or indirectly via inflation), even in the case of “AAA” countries like the US.
As usual the market is faster than credit agencies when it comes to downgrading.
