Here’s an interesting graph from the Bank of Canada’s Monetary Policy Report:
Yes, yes, I know; it’s almost impossible to tell the difference between the UK and Canada in that graph, but if you look at the original document and zoom in to 200% of the original size, you can (just barely) conclude that the UK series is the one that has the second-highest spread as of April 2008. Someone at the graphics department of the BoC deserves a scolding.
Anyway, here is a summary of what the the four central banks in that graph have faced since mid-July, and how they’ve responded:
- The US: The spread increased by 175-200 bps since July. The Federal funds rate has decreased by 300 bps.
- The euro zone: The spread increased by 125 bps. The ECB hasn’t changed its interest rates.
- The UK: The spread increased by 175 bps. The Bank of England reduced interest rates by 75 bps.
- Canada: The spread increased by 125 bps. After increasing its overnight target by 25 bps on July 10, the Bank of Canada has reduced interest rates by 150 bps.
Worthwhile Canadian Initiative 
Stephen,
It has been fascinating to watch the spreads on both investment-grade and below-investment grade (“junk”) corporate bonds over the past trimestre. Even some of the Canadian chartered bank bonds were trading, at least temporarily, at near 500 basis point spreads.
Some of the junk grade stuff–which I have been streadily buying–has been paying 10% to 14% net yields (calculated without reinvesting the coupons).
This is the first time, I have ever paid that much attention to bond yields during an economic turn-down as personal investment instruments as opposed to using yield curves as a growth oracle. Do bond yields typically behave this way in an economic downturn?
-Erik