Stocks are surging today after the Treasury Department's announcement of a new plan to get rid of toxic assets from the banks' balance sheets. But as an article in Bloomberg this morning noted -- stocks may be up, but the bond markets are still depressed.

The average spread between U.S. Treasuries and U.S. financial corporate bond yields was 8.55 percentage points at the end of last week. They reached a record high of 8.81 percent earlier this month (according to the Merrill Lynch U.S. Financial Corporates Index.) This spread is a good indicator of risk aversion, in normal times the spread between Treasuries and investment grade corporate bonds is less than one percent.

Bond investors are not as forgiving as their peers in the stock market. They're demanding a higher risk premium to hold onto banks' corporate debt. Banks still have tons of toxic assets on their balance sheets, and even with Geithner's plan, it is not clear if banks will be able to sell their toxic securities at a high enough price to ward off insolvency.

Meanwhile, economic fundamentals remain weak. Job losses continue to mount and home prices are declining, which could push even more homes into foreclosure. This was the main reason the assets on banks' balance sheets became toxic in the first place. Bloomberg reports:

Investors "are in a pretty big state of what I'll call denial, just hoping this stock-market rally will help them make back all their losses," said Diane Garnick, a New York-based investment strategist at Invesco Ltd., which oversees $357 billion. "Financials are still in trouble. There's a really good chance that bankruptcy is not out of the question."

Bond investors remain wary and are not jumping on the stock market's band wagon.

categories: Understanding The Crisis

2:18 - March 23, 2009

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