Notes on Economy: Egypt and the Risk Premiums on Debt Instruments

Egypt and the Risk Premiums on Debt Instruments

Developments in the US mortgage market, in Europe, in Egypt and in the US municipal bond market are only four data points in a long string of events that should convince every observer that practically all debt instruments carry inadequate risk premiums.  This has been true for years and in my opinion for decades.  Portfolio managers should be cognizant of this fact and to the extent possible buy only when the premiums increase, such as at the recent bottom of the high yield bond market or the European sovereign debt markets.  It is possible that the increase in the risk premiums by Fannie and Freddie now being contemplated as well as on FHA mortgages will provide an impetuous for other debt markets.  Until then, however, taking risks in the stock market is still more reasonable even at present levels.

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