A dramatic gap has opened in how banks and the bond market perceive the health of corporate America, with banks setting aside billions against bad loans even while bond prices suggest a dramatic recuperation from the Covid-19 shock.
US banks’ loan loss reserves have risen by $110bn since the crisis began, and are now equivalent to 2.2 per cent of their loan portfolios, the highest level since after the financial crisis in 2012.
Meanwhile, the difference in yield between US government debt and corporate bonds with the lowest investment-grade rating appears to indicate that the pandemic crisis is all but over. The spread has tightened from almost 5 percentage points in March to well under 2 points now — as narrow as it was early last year.
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