Corporate bonds valuation - Spreads vs History
EU Investment Grade All-in Yields
Insights | EU
Understanding the current market value of corporate bonds requires looking at both their spreads and their all-in yields. Spreads measure their credit risk within a known interval, while all-in yields (spread + govt bond yield) reflect their total income potential. Benchmarking both against historical percentiles allows investors to identify what is cheap or expensive vs past experience.
CURRENT READINGS
At 3.71%, EU Investment Grade all-in yields are currently at fair value.
MARKET IMPLICATIONS
EU IG all-in yields are currently compensating investors fairly- the asset class remains compelling for the long term from a valuation perspective
In general terms, expensive spreads justify further compression only with a positive view on upcoming growth and investor sentiment. When levels move to fair value, cheaper, cheap or very cheap, it has been typically wiser to buy | add | accumulate.
US Investment Grade Spreads
Insights | US
Understanding the current market value of corporate bonds requires looking at both their spreads and their all-in yields. Spreads measure their credit risk within a known interval, while all-in yields (spread + govt bond yield) reflect their total income potential. Benchmarking both against historical percentiles allows investors to identify what is cheap or expensive vs past experience.
CURRENT READINGS
At 74 bps, US Investment Grade credit spreads are currently expensive.
MARKET IMPLICATIONS
US IG spreads are currently bound to deliver limited (or negative) returns in the medium term- hold or buy only if very convinced that the economic outlook will continue to improve to justify further spread compression. If not, at these levels it has been historically wiser to sell or stay away
In general terms, expensive spreads justify further compression only with a positive view on upcoming growth and investor sentiment. When levels move to fair value, cheaper, cheap or very cheap, it has been typically wiser to buy | add | accumulate.