Executive Summary
The spreads on Moody's Seasoned Aaa and Baa Corporate Bond Yields Relative to Yield on 10-Year Treasury have slowly narrowed in the last twelve and six months, representing an economy with greater capital flow and investor optimism. In conclusion, you should stay invested in the S&P 500 and NASDAQ 100.
Why You Should Care About Bond Credit Spreads!
Credit spread is the risk structure of interest rates as it helps investors and traders gauge investment risks. The widening and narrowing of credit spreads reflects the market sentiment on risk management. For this investment report, you will see the credit spread of corporate bonds relative to that of the U.S. government, and that will give you a clue about the current market sentiment. Simply put, in this case, credit spread is the difference in interest rate between two different bonds. An Aaa bond rating represents maximum safety, whereas a Baa one represents lower medium safety.
Historical Chart Analysis
Key Points
In the past twelve months, Aaa and Baa’s spreads have narrowed by 0.21% and 0.64% respectively. The spread on Moody's Seasoned Aaa Corporate Bond Yield Relative to Yield on 10-Year Treasury Constant Maturity remained unchanged, MoM, and decreased by 0.04% and 0.02% points, compared to six months ago and to the beginning of the year, respectively. The spread on Moody's Seasoned Baa Corporate Bond Yield Relative to Yield on 10-Year Treasury Constant Maturity increased by 0.02% points; however, in the past six months and YTD, the same spread has narrowed by 0.22% and 0.16% points, respectively.
Investment Analysis
Based on the narrowing of the credit spreads, the US market does not see a troubled economy; in fact, the market expects the economy to grow at a steady pace in Q3. Credit spreads have narrowed since the beginning of the year, while the S&P 500 is up 15% during the same period; such returns represent great capital flow through the economy. In conclusion, invest in the S&P 500 and NASDAQ 100.
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