Valuation of US IG corporate bonds

assessing their value vs history

Are US IG bonds cheap or expensive ?

All-in yields

• at 5.08% all-in yields for EU Investment grade corporate bonds are currently expensive, based on historical observations: bound to deliver limited (or negative) returns in the medium term with a few exceptions
• hold or buy the asset class only if very convinced that the economic outlook will continue to improve to either justify further spread compression or to maintain current yields levels steady to keep generating sustainable income. If not, it is better to stay away.

Spreads

• at 90 bps credit spreads EU Investment grade spreads are currently expensive, based on historical observations: bound to deliver limited (or negative) returns in the medium term with a few exceptions

IntroAssessing the value of individual corporate bonds is a subjective and complex exercise based on multiple factors and types of analysis. To simplify the task while staying accurate, we look here at how much spread and all-in yield the average corporate bond market is currently paying vs history.

Chart guideIn the analysis, we look at both corporate bonds' all-in yield (the sum of the yield paying by the underlying government with the same maturity, plus a spread) or just credit spreads on a stand-alone basis.

We suggest to corporate bond fund managers or asset class experts to mainly focus on the spreads chart for relative value analysis vs individual bonds of interest. For anyone else, the focus should be on all-in yields, as those are the yields ultimately paid in full to investors of any kind.

Market implicationsFor long-term investors, initial entry levels are important: cheaper yields/spreads are more likely to return higher income streams over the long term. For traders, valuations are also key but they need to be considered alongside the tactical economic outlook and short-term expectations, to predict short-term yield changes in a specific timeframe.

Valuation of US HY corporate bonds

assessing their value vs history

Are US HY bonds cheap or expensive ?

All-in yields

• at 7.17% all-in yields for EU Investment grade corporate bonds are currently expensive, based on historical observations: bound to deliver limited (or negative) returns in the medium term with a few exceptions
• hold or buy the asset class only if very convinced that the economic outlook will continue to improve to either justify further spread compression or to maintain current yields levels steady to keep generating sustainable income. If not, it is better to stay away.

Spreads

• at 327 bps credit spreads EU Investment grade spreads are currently expensive, based on historical observations: bound to deliver limited (or negative) returns in the medium term with a few exceptions

IntroAssessing the value of individual corporate bonds is a subjective and complex exercise based on multiple factors and types of analysis. To simplify the task while staying accurate, we look here at how much spread and all-in yield the average corporate bond market is currently paying vs history.

Chart guideIn the analysis, we look at both corporate bonds' all-in yield (the sum of the yield paying by the underlying government with the same maturity, plus a spread) or just credit spreads on a stand-alone basis.

We suggest to corporate bond fund managers or asset class experts to mainly focus on the spreads chart for relative value analysis vs individual bonds of interest. For anyone else, the focus should be on all-in yields, as those are the yields ultimately paid in full to investors of any kind.

Market implicationsFor long-term investors, initial entry levels are important: cheaper yields/spreads are more likely to return higher income streams over the long term. For traders, valuations are also key but they need to be considered alongside the tactical economic outlook and short-term expectations, to predict short-term yield changes in a specific timeframe.