1. Contributed by Aletrax Advisors, on information to 21 May 2019
Bond focus: Valuation of US IG corporates
Our barometer evaluates the equilibrium corporate yield (Barclays aggregate IG) as function of: Treasury yield, VIX and the dynamics of the economy as captured by the ISM survey. As result, the corporate bond yield evaluation is conditional to that of the government bond yield.
Therefore if, as our chart shows, the US corporate aggregate yield seems to be in equilibrium, it means it is “fair” relative to Treasuries (i.e., the spread is fair) while it is dear in absolute terms in so far as Treasuries (the anchor) are expensive vs. fundamentals (see previous slide).
It is interesting to note that the influence of the real economy (ISM) has increased significantly since the Great Recession , as shown in the right hand chart. Thus, the longevity of this recovery has provided steady support to corporate bonds.
While Treasuries are expensive vis a vis fundamentals, IG corporates are not dear to Treasuries. Hence they should have, given their yield advantage, a significant share of the fixed income bucket in portfolios.
Contributed by Aletrax Advisors, on information to 21 May 2019