Here’s something that isn’t as bad as 2008

High-yield spreads remain far below levels seen in the financial crisis

Let’s say you are more popular than me and have two friends. One friend is super trustworthy and asks to borrow a thousand dollars for a year. You say, “sure but why don’t you give me fifty bucks on top when you pay me back to compensate for all that time.”

Another untrustworthy friend comes to you and also needs a thousand dollars. And you say, “sure but why don’t you pay me back fifty bucks on top and another fifty bucks to compensate me for lending to your untrustworthy character.” Simply put, you want a higher yield from the guy you don’t trust because you perceive a higher risk to the transaction.

Companies are kind of the same way. They go out into the market and ask to borrow money. Investors then assess what they require to make the transaction happen. And, to help people figure out what companies are untrustworthy or not, they are given grades called credit ratings.

These ratings are often put into two broad categories: investment grade and non-investment grade. Non-investment grade is also sometimes referred to as high yield, cause it’s bad stuff and people want a better yield for the investment since it’s rated poorly. And, if you take an average of the high yield stuff out there and take the difference against an average yield of less risky things, it looks like this over time:

Given how crazy the last few months have been, it’s refreshing to see a chart that isn’t completely broken by recent data. In fact, that’s a huge development.

See, back when the outbreak was exploding and markets were spiraling, credit markets were in a really bad spot. Fortunately, the Federal Reserve was able to calm markets down and the recent spike leveled off well below the high from the Financial Crisis.

This metric is really important in the world of finance and so, if I had to give some contributing rationale for why the stock market is where it is right now, it’s because the non-investment grade market isn’t nearly as bad as other areas of the economy. But, that can always change - so keep an eye on this spread!