The spread between yields on US corporate Aaa and Baa bonds is as low as it has been in 50 years

John Robertson


The spread between yields on US corporate Aaa and Baa bonds is as low as it has been in 50 years. Since debt markets are usually more sensitive to changing economic conditions than equity markets, the yield spread is a useful indicator of market thinking. It implies a heightened appetite for risk which is consistent with record equity prices. Now, the question is whether the elastic has been stretched as far as it will go. At a minimum, the balance of risks appears to have altered. Recent signs of flows out of high yield funds may be significant. One consideration worth bearing in mind in assessing the potential for changes in the yield differential is the dismantling of US bank trading desks. Moves to sell high yield or lower rated securities may encounter less liquid market conditions than they have done in the past.

John Robertson is Chief Investment Strategist for PortfolioDirect a provider of resource sector investment stock ratings and portfolio strategies for mining and oil and gas investors. He has worked as a policy economist, corporate business...


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