Saturday, September 24, 2011

AAA vs. BAA Bond Spreads

Below, Corrections takes the difference between daily AAA and BAA rated bonds (Moody's, from the FRED database) and displays recessions (click to enlarge).
When the data from Operation Twist and the subsequent days become available, we'll put those graphs up too.

2 comments:

  1. Big differential reaction. One wonders if this change correlates with the VIX? That is, during times of high market volatility (reflected in the VIX), is there a differential increase in the bond spread?

    ReplyDelete
  2. Corrections Page OneOctober 2, 2011 at 4:40 PM

    That sort of correlation would make sense. We intended this graph to indicate that the variance in bond returns was driven by risk, not intertemporal substitution. VIX is often used as a similar measure.

    The difference may be that bond spreads like these (I conjecture) are driven almost solely by the fear of default, where VIX could simply be uncertain times (that is, it would also increase when people are uncertain whether or not we're going to have a good time or a very good time, while spreads would presumably fall to historical norms in both cases).

    ReplyDelete