Elfenbein: On Bond Risk Premiums

Eddie Elfenbein at Crossing Wall Street has charts of AAA and BBB bonds illustrating the bond risk premium.

As you can see, the risk premium seems to bounce between two points. It's either less than 10%, or more than 20%. That's a very rough generalization but there's not much in between.

When the premium rises above 20%, that means that investors are demanding more money to take on greater risk. The high premium signals fear with investors are generally coincides, and often causes, a recession.

As you can see in his chart risk premiums are still high. The TED spread (short term treasury compared to short term commercial bank paper) is another way to look at sentiment and fear. i posted this chart recently showing some improvement in the TED spread.