An interesting indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December 2008, showing that bond investors have over the past 15 months favored more speculative bonds over high-grade bonds. (Note that this is a relative comparison, as both categories have improved, but lower quality bonds more so than high-grade ones.

It is interesting that the Index has surpassed its pre-Lehman level, but still has more work to do in order to reach pre-crisis levels. As an aside, the S&P 500 Index has to gain another 8.8% in order to reach its pre-Lehman level of 1,252, and 36.1% to reclaim the 2007 pre-crisis peak. As equities and corporate bonds scale fresh cycle peaks, this should serve as a reminder that the economic recovery still has quite a way to go.


Source: I-Net Bridge

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.