US Corporate Credit Markets Are Looking Extraordinarily Expensive

By Walter Kurtz, Sober Look

One of the “side effects” of the Fed’s monetary expansion is all the capital flowing into spread products, particularly corporate credit. Corporate bond yields are hitting record lows across the ratings spectrum. An average junk bond in the Merrill HY index now yields some 6.3%.

Merrill HY Index effective yield (source: St. Louis Fed)

Even emerging markets corporate HY bond yields are near all-time lows.

Merrill Emerging Markets Corporate HY Index effective yield (source: St. Louis Fed)

In fact credit looks highly overpriced relative to US equities. And equities are not exactly cheap at this stage, particularly given some 2% GDP growth expectations in the US. Goldman’s relative value model now shows corporate credit at the richest levels in at least three decades.

Source: GS


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Sober Look

Sober Look

Sober Look was founded by Walter Kurtz, a New York based hedge fund manager and credit markets specialist.

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  1. The absolute level of yields (the above chart) tells you very little about corporate bond valuation. You really need to look at corporate spreads. Granted, spreads have narrowed recently, but they are nowhere near their all-time tights.

  2. Correct but spreads are narrowing. In a few months we will have the mother of all the bubbles ready to pop (i.e the credit market as a whole). Probably, as all the previous bubbles, will take time to detonate but at last… what a bang !

  3. True but not for HY in my thinking, yields here are supposed to compensate for default probability, the level of the risk-free is less relevant. In the opposite spectra of Aaa yields compensate investors for inflation risk, which is low and hence yields (long) are low.

  4. Agreed. I was thinking more about investment grade corporates. HY bonds tend to trade more on a price basis (rather than spread or yield). This supports your point about default being the primary concern when looking at HY bonds.