TED SPREAD, Corp. Bonds etc. etc.

Back in the good old days we would all listen to Henry Kaufman and his deliberations on the bond markets, sit on the edge of our chairs to hear the growth in M1 (later other Ms), listen to capacity utilization or , last in vogue, the I do not remember why it was called that but  it represents the  spread between 3-month Treasuries and 3-month interbank lending rates as quoted in London. It was then ,and is now, a good gauge for the liquidity in lending and by extension the interest differential between government and banks. Here is the chart.

TED SPREAD SHORT TED SPREAD LONG

Notice how the recent travails of the banks gave rise to a spread of (only) 450 basis points or 4.5% That is a lot less than the spreads back in 1980 of almost 6%. This spread works its way all the way down the food chain and widens considerable when you compare corporate AAA bonds with lesser credits like Baa bonds. See below;

CORP BOND YIELD AAA CORP BOND YIELD BAA

On the left is AAA and on the right Baa, both are still investment grade.  Now if you look closely, you will see (click on the charts to enlarge and move one above the other). I cannot get a good junk bond chart but it had a spread of 22% recently. The point here is that if you buy any bond , or bond ETF, even slightly below government quality, you very quickly can get into big trouble. At one point recently junk-bonds were trading at 22% above AAA and have come down to close that gap almost entirely (now about 4%). To me this is a very crowded trade to be avoided because it is now too late!