On the coming credit meltdown.

• Author: Rees, Matthew
• Position: U.S. Economy

"In recent months, lower credit bonds--vonventionally defined as BB+ and below--have traded at a smaller risk premium (as compared to U.S. Treasuries) than ever before in history. Over the past 20 years, this margin averaged 5.42 percentage points. Shortly before the Asian crisis in 1998, the spread was hovering just above 3 percentage points. Earlier this month, it touched down at a record 2.63 percentage points. That's less than 8 percent money for high-risk borrowers."

"In 2006, a record 20.9 percent of new high-yield lending was to particularly credit-challenged borrowers, those with at least one rating starting with a 'C.' So far this year, that figure is at 33 percent. No exaggeration is required to pronounce unequivocally that money is available today in quantities, at prices and on terms never before seen in the 100-plus years since U.S. financial markets reached full flower."

"Why should so many theoretically sophisticated lenders be willing to bet so heavily in a casino with particularly poor odds? Strong economies around the world have pushed default rates to an all-time low, which has in turn lulled lenders into believing these loans are safer than they really are. Just 0.8 percent of high-yield bonds defaulted last year, the lowest in modern times. And with only three defaults so far this year, we've luxuriated in the first default-free months since 1997. By comparison...