Investment prices keep rising. Valuations are now well beyond long term averages for many asset classes. Pundits are increasingly calling for a big correction. Fears of overvaluation is also found in the corporate bond market. Credit spreads – the extra margin for default risk – are now notably lower than averages. But so too are expected default rates. Putting these two factors together makes the A$ corporate bond market, overall, appear around fair value to us. Add in the prevailing quest for yield and corporate bond spreads look like being well supported in the coming six months. In our view, those currently shunning corporate bond risk due to a reference to a one dimensional valuation technique – average credit spreads – look destined to generate below average returns.
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