Why interest rate spreads are so low.

So bonds are yielding very low currently.  The spreads are very low.  currently.  Its hard to explain if you think that you should be rewarded for holding more risky notes/ bonds.  There is systematic country and currency risk then there is just the risk of the borrower defaulting and both of these are currently mounting.   We were in a recession and probably are still in one.  With the avg american in the past several years having spent more than they made.  Americans have gone more and more in debt every year "helping" the economy.   Eventually you realize things aren't going to get that much better  every year your big raise isn't coming this next 6 months you probably shouldn't spend more than you made in fact you might want to save some of that. 

Well now people are saving more but that takes away from consumption.  With the big pull back in the stock market and commodities, people pulled out lots of $ and were holding on to them trying to find out what to do.  After many people lost 50% of there money in stocks and commodities.  People have decided to put there money back into bonds I was talking with a portfolio manager that manages 4 billion for an institution he said that according to money flow indexes 90% of money flowing into markets is going into bonds.   With this increase in bond holdings greatly increasing the supply of money.  The demand for money is staying the same or decreasing.  Companies don't want to buy huge new corporate warehouses and new commercial real estate.   Expansion has slowed.   The same thing with consumers we stand to consume less we never needed to consume at the rate we did.   Just cause money is cheap doesn't mean you need it.     So Demand increase for money because of its lower interest rate has not increased.  Businesses don't know if they will be able to make more money with there new borrowings some don't even know if they can pay off there past debt.  Check out the graph below to check out whats happening.   So with supply increasing and no more or slightly more demand the interest rates continue to fall.   And spreads will get thinner.  People will want higher returns.  But they will have to take riskier and riskier debt.    Its a risky bizness but someone has to do it.