Calm Corporate Bond Market Shows Everything Is OK, Says LPL:
The stock index is clearly at its peak and the high valuations are reminiscent of a bygone era when investors were plagued by foolish optimism. And then there is the threat of inflation. But there is a place that indicates that all is well and the calm sea will prevail. This would be the corporate bond market.
“Corporate credit markets continue to tell an encouraging story of economic recovery,” wrote Lawrence Gillum, a fixed-income strategist at LPL Financial. The strength of the $10.7 billion corporate bond market is a positive indicator for the equity and debt markets, he said in a research paper.
Last year, investment and risk-grade companies issued more than $2.3 billion in debt, one of the best years to sell bonds, he noted. The trend continues. According to the Association for Securities and Financial Markets Industry (SIFMA), issues this year through the first quarter are 7.6% higher than in the previous year.
Adequate allocation of options between corporations and the treasury is strict, indicating that mortgage buyers are inept because they don’t demand much extra return on risky government bonds. For example, the spread for high-yield companies is just over 3 percentage points. Last September it was 5.6 percentage points. During the worst financial panic of the pandemic, the difference was about 10 percentage points.
Gillum stocks tend to “push the markets during market stress.” However, the lack of volatility in fixed income corporate bonds is also a good sign for equity investors.
“Sold out” shows that corporate distribution data and corporate borrowing costs are low, he said. The decline in borrowing costs “indicates things are going well,” he added. Supplemental insurance comes from solid corporate balance sheets, he emphasized.
And Gillum noted that the government bond market is becoming increasingly volatile. The standard 10-year government bond yield reached 1.48% on Tuesday, well below the year-to-date high of 1.74% in March.
What can improve business peace of mind? Gillum said the number of mergers and acquisitions (mergers and acquisitions), share buybacks, and increased dividends — all juice companies — could increase the spread.
However, LPL is neutral about the quality of investments and less optimistic about waste. He said equities offer growth potential for the rest of 2021, the so-called surprise visa for higher expected earnings, which is always a benchmark for equities.
However, he did not mention one factor: the outlook for the inflation market is still bleak, with a balance sheet ratio of 2.46% from 2.46%. The reference, of course, is what the Treasury and TIPS consider to be the Treasury’s inflation secrets. Inflation, like rising bond prices, will be an unwanted intruder into the fixed status quo that the financial world now enjoys.