Stocks say recession, bonds say depression

[cnn-photo-caption image=http://i2.cdn.turner.com/cnn/2008/images/12/11/art.ustreasury.jpg caption="The U.S. Treasury building."]

John Curran
Time

Extraordinary things are happening in bond land lately. Tuesday's head-spinning news that Treasury bills had been auctioned off with negative interest rates is only the latest in a series of astonishing developments, surpassing even the more widely followed stock market swings.

While the Treasury auction grabbed headlines, corporate bonds are doing equally amazing things: The average yield on lower quality investment grade corporate bonds — triple-B rated — is hovering around 10%, an unusually rich 7.5 percentage point spread over Treasury bonds of similar maturity. (That spread has tripled over the past year.)

Or consider junk bonds, as measured by Merrill Lynch's High-Yield bond index, which yield a jaw-dropping 22%. Of course, junk bonds come from the riskiest borrowers, and a deep recession could drive up the default rate among those companies. But current lofty yields imply investor expectations that one fifth of these bonds will default, according to Moody's, even though the recent default rate in this sector has been around 3%. Notes Kirk Hartman, chief investment officer for Wells Capital Management, a division of Wells Fargo bank: "Spreads [over Treasuries] in the bond market are pricing in a depression scenario while the equity markets, despite a substantial decline, are pricing in a recession." (Read "The Recession Is Made Official — and Stocks Take a Dive")

Read More...