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In the 1980s, high-yield bonds often yielded 13% to 14%, substantially higher than the 10% to 11% yield called for in the recent pricing of Chrysler's debt.However, the Chrysler debt might be dramatically more expensive than the higher yields of the 1980s. During the decade of Reaganomics, while inflation was coming down, it was still very high. Real GDP growth of 6% plus inflation of 8% brought nominal GDP to 14%. When compared to high-yield bonds of 13% to 14%, the cost of the debt was not too expensive.
In today's market, with real GDP growth approaching 3% and inflation at 2%, this translates into nominal GDP of 5%. With high-yield bond rates of 11%, it is roughly double nominal GDP growth. That is expensive debt.
This means real interest rates in the high-yield bond market are 8% to 9%, which might be too high for an economy that is more mature and has lower inflation. Many bond investors are saying high-yield rates are correcting back to a normal spread. However, when compared to inflation, real interest rates are very high.
The Fed's goal: get real interest rates lower. The first cut should come in September, followed by at least two more rate cuts by year end.
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Reader Comments (Page 1 of 1)
8-20-2007 @ 3:33PM
Suzanne said...
The Fed should move very slowly. Let the "free market" work and give some pain to Wall Street and ist brokers who have been flush with cash. Let the market correct itself.
8-20-2007 @ 6:48PM
pullee998 said...
The Fed should cut rates down to the 4% level, or lower. If the Fed does not cut rates, this economy is going to crash, and crash very hard. Look at the "re-sets" for this calander year - 167 billion. Next year the resets will be well over 500 billion. Wake up Mr Bernanke! Jim Cramer hit the nail right on the head.
8-20-2007 @ 8:38PM
Mr. noitall said...
If you want to base your analysis on inflation being at 2% you're not living in the REAL world. Bernanke can lower rates if he wants, but I believe I move like that would destroy the dollar, and sent REAL rates even higher.
8-20-2007 @ 11:19PM
Keith Gregory said...
Well- there is a reason to consider lowering rates- yes, the economy is strong, but if the mortgage industry is impacted, such that normal borrowers are shut out, that will reverberate around the broader economy:
http://www.mortgageindustrytrends.net/liquidity_crises_alt_a_market
8-20-2007 @ 11:37PM
randolph said...
This whole mess started from Federal Government, you figure it out. They are the one lending this amount of money thru the bank's and mortgage company. In this case it back fire on them. Now they have to use their reserve meaning our Social Security smart thinking. What's next. Bernasky are you still on hibernation wake up.
8-21-2007 @ 6:37AM
justpicky02 said...
the ones who's living in the REAL WORLD are the middle class .........it's effecting them , the worse .
Lower income $ 20k or below , has no clue
Higher income 100k and above , it's not effecting them either , they could careless .
Again it's the middle class .......they understand everything ...........