The first method of measuring the market's pricing of credit risk is to look at the level of credit quality spreads
, that is, the incremental yield the market pays to entice an investor to purchase securities of lower credit quality.
Business confidence has stabilized as well: Stock prices have risen, and market volatility and credit quality spreads
Friedman and Schwartz (1963) and Mishkin (1991) found that quality spreads
historically have reflected financial turbulence.
As a result, quality spreads
escalated dramatically, especially for lower-rated issuers.
The concern for quality spreads
into the personal lives of Wynne and Hefner as well.
Terms and conditions of bank loans and capital market credit reflect these revised judgements about future profitability, and quality spreads
have widened in recent months to the detriment of suspect firms.
This optimistic attitude has become especially evident in quality spreads
on high-yield corporate bonds--what we used to call "junk bonds." In addition, banks have continued to ease terms and standards on business loans, and margins on many of these loans are now quite thin.
Financial markets digest these disparate viewpoints and reflect their net effect through prices, volume, quality spreads
, and write-offs.
The performance of stock market prices and the relatively narrow quality spreads
in debt markets attested to a considerable, degree of confidence among investors.
In many securities markets, quality spreads
, when measured by the difference between rates on private and Treasury instruments of comparable maturities, have been quite thin.
Historically, many such indicators have come from the financial sector: Money supply growth, the slope of the yield curve, quality spreads
, and credit flows are among the variables that have helped the monetary authorities over the years act in advance of developing problems.
The improvements in balance sheets, together with the beneficial effects of lower interest rates, have been reflected in reduced delinquencies on consumer loans and home mortgages, increased upgradings of firms' debt ratings, and narrowed quality spreads
on corporate securities.