Equity yields look poor compared to high-grade credit yields
DB argue that credit as an asset class has not looked this good vs equity in a long time.
In a recent desk note to clients, Deutsche Bank comments that "credit as an asset class has not looked this good vs equity in a long time". They specifically highlight that the "gap between the equity dividend yield and credit yield to maturity has narrowed to under 150bp compared to the historical average gap (since 2015) of close to 300bp".
We've replicated a version of a chart that DB produced, which you can see enclosed below. The yields on floating-rate notes have been boosted by a dramatic increase in the bank bill swap rate (BBSW), which has jumped from 0.0% in 2021 to 4.3% today (care of the RBA's record cash rate move to 4.1%).
If you then layer-on a big expansion in the credit spreads on high-grade financial bonds (as we projected would eventuate in late 2021), all-in yields seem historically attractive. For example, the major banks' Tier 2 bond spreads above BBSW have jumped from 1.25% in 2021 to circa 2.2% today (and as high as 2.8% earlier in the year).
This means the all-in running yield on 5-year Tier 2 bonds has leapt from 1.25% in 2021 to around 6.5% today. Put differently, CBA's bonds are paying superior interest rates to the fully-franked dividends on CBA's shares, the latter of which are leveraged some 15 times (on a non-risk-weighted basis)....
Learn more about our floating-rate high yield fund here.
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Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 40 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha Managers” based on his risk-adjusted performance throughout his career across. He previously worked for Goldman Sachs in London and Sydney, the Reserve Bank of Australia, and founded the award‐winning research/investment group, Rismark. He has regularly advised governments, developing unique policy proposals. Chris graduated with the University Medal (Economics & Finance) from Sydney University. He studied in the PhD program at Cambridge University in 2002/03, leaving to set up his funds business.
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Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 40 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...
Expertise
Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 40 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...
Expertise
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