Saturday, May 25, 2013

Credit spreads are moderately attractive

Corporate credit spreads today are at post-recession lows, which makes them much less attractive than they were four years ago. However, they are still above the levels that prevailed during the strong growth phases of the previous two business cycles. Spreads are thus only moderately attractive. Investment grades spreads offer only a modest cushion against an increase in Treasury yields, while high-yield spreads offer substantially more. Bear in mind that Treasury yields are likely to rise only to the degree that the economy and/or nominal GDP picks up, and in either case that would reduce the risk of defaults, thus providing a further cushion against higher Treasury yields. 


UPDATE: I think spreads at this level reflect a market that has lost a good deal of its pessimism, but is not necessarily optimistic or overly optimistic. High-yield spreads are still 200 bps above the lows of early 2007, when the economy was growing at a reasonable pace and the future looked OK, and the subprime mortgage crisis was still in its infancy. Investment grade spreads are only 60 bps above the 2007 lows.

8 comments:

William McKibbin said...
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William McKibbin said...
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William McKibbin said...
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Benjamin said...

It is natural to think that "interest rates will go up."

That is not what happened in Japan, however.

Bernanke recently testified that inflation was at 1 percent, and no alarm bells were set off at the Fed. That says to me the Fed is (erroneously) comfortable with very low inflation rates---I mean, any lower than this, and you get to zero-deflation, ZLB land, where Japan has been for the last 20 years.

The good news is that all over Asia central banks are talking growth and easing, and not fighting inflation. The BoJ, the People's Bank of China, the Reserve Bank of India, and smaller banks, such as Thailand, Indonesia, S; Korea and especially Taiwan, are talking about easing.

And you have the Fed in slow-motion buying $85billion a month in bonds. Very mild stimulus, though some say in fact the Fed is pursuing a tight-money policy, as evidenced by falling rates of inflation.

Things look good for real estate, probably especially Asia. Japan REITs have boomed.

Europe's ECB is committed to suffocating Europe, and they will be a drag on the global economy for a while

The risk is that central banks weaken, and cut QE or stimulus.

William said...

After Merkel's re-election this summer in Germany you will see a more pro-growth policy for Euroland as well.

Gloeschi said...

"Skepticism and caution are still wide-spread" CBP, May 28

"... a market that has lost a good deal of its pessimism" CBP, May 25

"Investors have very pessimistic assumptions for economic growth over the next few years" CBP, May 6

=> You would gain credibility if you stopped making those conflicting statements. On top of that, you opine on 'prevailing sentiments' without much supporting evidence.

William McKibbin said...

I doubt that emotions such as optimism can change America's fate in the coming years -- not this time...

Richard C. Lambert said...

Bear in mind that Treasury yields are likely to rise only to the degree that the economy and/or nominal GDP picks up, and in either case that would reduce the risk of defaults, thus providing a further cushion against higher Treasury yields. freecreditreport