The healthy state of corporate balance sheets overall is also apparent
in corporate bond spreads, which remain at relatively low levels.
According to Merrill Lynch data, high yield
corporate bond spreads tightened for the second day in a row today, and while that doesn't seem like much, it is the first time this month that spreads tightened for two consecutive days.
Nobody is really talking about it but, with the Fed tightening this week amid
rising corporate bond spreads, Ray Dalio's 1937 analog continues to rhyme.
Since corporate bond spreads — particularly lower - rated high - yield credits — are correlated to stock - market returns, a large increase in the VIX often correlates to corporate bond underperformance.
Corporate bond spread as a proxy for default risk by Deniz Anginer of University of Michigan, and Çelim Yıldızhan of University of Michigan (492K PDF)-- 47 pages — January 18, 2010
I regressed the yields on the three and ten - year treasuries, and a triple -
B corporate bond spread series on twelve month trailing earnings yields for the S&P 500.
Although some posters are right in saying that something like earnings yield
vs corporate bond spread is possibly a better comparison, I still think AccruedInterest is fine with plotting a price level.
The rapid compression
in corporate bond spreads, however, dulls our enthusiasm and highlights our current preference for quality over yield.
Still,
corporate bond spreads have come up to around their historical average, providing impetus for institutional investors trying to claw out yield any way they can, even if it means an extraordinarily long - term commitment.
The two main components of this are
corporate bond spreads and the cost of hedging the proceeds back to the home currency of the issuer.
For example,
corporate bond spreads, as well as indicators of expected volatility in some asset markets, have fallen to low levels, suggesting that some investors may underappreciate the potential for losses and volatility going forward.
Further,
corporate bond spreads have fallen recently to relatively low levels, suggesting that access to external finance is not being constrained by concerns over credit quality.
Corporate bond spreads have moved lower over the past six months to around five - year lows, suggesting that concerns over credit quality are not hampering access to external funding.
Finally, because of arbitrage between equity prices, equity volatility,
corporate bond spreads and credit default swap spreads, even a dislocation in the equity markets can lead to trouble in the debt markets and vice versa.
Equity markets have rallied, and implied volatilities and
corporate bond spreads have fallen.
Global
corporate bond spreads have shrunk this year and are expected to tighten further, should the European Central Bank (ECB) extend its asset purchases.
But the Fed is not so sure, and officials note that
corporate bond spreads have narrowed over U.S. Treasuries, and that although mortgage rates have risen, they are still low.
As I commented to a Treasury staffer after the meeting, with financing rates so cheap to buy financial debts, regardless of what kind, it is no surprise that
corporate bond spreads have tightened, while there is still little lending to finance growth in the real economy.