Causation Both Ways

It is commonly asserted these days that extremely accommodative monetary policy is driving down yields on junk bonds to historical lows. The situation has gotten so drastic that people have even started to use the word “bubble,” which is what Very Serious People say when something they don’t like seems overvalued.

This excited me because the BofA High Yield (junk bond) index happens to be an index that I look at on a daily basis like it’s my business – because in part it is.

So for an illustration of how dramatically low rates have been driven down, look at the following. If you’re a corporation today looking to get funding you’re undoubtedly in the greatest market in history.


What I wonder, though, is that if today’s rates are a bubble inflated by loose monetary policy, then surely 2008-2009 shows drastically incontrovertible proof that Fed policy was far too tight, when yields were pushing 25% and the market essentially ceased to exist.

The camp that hates Alan Greenspan and is convinced that the Fed overheated the economy leading up to the recession would never admit such a thing.

Turns out shit flows up the yield curve as well as down.


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