Spreads on bank bonds to collapse?
So at this point it is quite clear that although fannie and freddie were never given an explicit government guarantee, their implicit guarantee was quite real. The implicit guarantee allowed the agencies to borrow at reduced cost as their default risk was assumed to be close to zero.
With the impending banking regulations coming from the fed, it seems that Bernanke has publicly acknowledged and confirmed that their are some institutions that are too big to fail (see the most recent press address). Bernanke is increasing these banks capital requirements with what appears to be a signal that the US isn't letting these firms go anywhere.
So, it seems to me that spreads on financial corporate bonds over treasuries are likely to collapse as investors decide their is almost no risk in bank bonds over treasuries.
What do you all think of this? Do any of my assumptions seem questionable? If not, how close to treasury yields can bank bonds drop? Can we see a near-zero spread?
Yeah but watch out because if Greece collapses then there are a bunch of knock-on effects and these will hit the banking sector...
Your theory is plausible but keep in mind that bond spreads can blow out in the short-term, especially in times of crisis.
The spread could narrow due to Treasuries' yields rising and corporate bonds' yields remaining constant or not rising so much. no true for banks holding toxic European shit on the balance sheets.
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