High Yield Credit Spreads Top Levels of 2003

This chart from Bespoke Investment Group shows the “spread” or difference in yields between two classes of bonds: high yield or "junk" bonds and comparable Treasuries issued by the U.S. government. High yield bonds do well in times of economic expansion, as investors anticipate the great returns from the scenarios sketched in prospectuses. They do poorly in times of contraction, as the yields are driven higher (and the price lower) by fears of bankruptcy. The snapshot above was taken by Bespoke on October 2, 2008.

The chart below (click for updates) measures the same thing as the chart above, but does so by taking the ratio between two exchange traded funds (HYG & TLT) that are proxies for high yield bonds and comparable long-term Treasuries. The panic in the week of October 6-10 drove the ratio down more than 30 percent from mid-summer 2008. "The corporate bond market," wrote one specialist on October 21, "is a broken shattered vessel and a shoddy reminder of its once mighty and powerful self."