The graph above says it all. It compares the yield spread between a Procter & Gamble corporate bond maturing in 2012 to a comparable treasury bond (same coupon and similar maturity). A positive spread occurs when the yield to maturity of the corporate bond is more than that of the treasury (which is as it should be). Lately, a certain number of corporate bonds have been priced with yields that are inferior to that of treasuries. This is an interesting situation because it means that investors perceive treasuries (backed by the full faith and power of the U.S. government) as being riskier than that of a corporate bond. Mind you, there are many businesses out there that have very clean balance sheets (at least cleaner than that of the Fed) and for some of them (we all know who they are), it is partially thanks to government intervention that they are in better shape.
The perception of risk is clearly shifting for government debt mainly because it has a large (and growing) inventory of the riskier kind of debt that is starting to take over a larger portion of their balance sheet. As the saying goes, you are what you eat!
