One of the best places to look to assess risk attitudes is the corporate bond market. When investors become squeamish about just about anything, they sell corporate bonds in favor of safer assets such as U.S. Treasuries. The yield spread between corporate bonds and Treasuries will hence tend to widen when investors become anxious.
While there is clear evidence of increased fear apparent in the corporate bond market, the depth of that fear is not yet substantial. Current yield spreads reflect more a reversal of high levels of risk-taking rather than any meaningful fear about the economic outlook.
A good gauge of trends in credit spreads is the S&P Speculative-Grade Credit Index. It closed at 314.1 on Monday (the last day of available data), down 5.6 basis points from a week earlier. Although the index is up from its nearly two-year low of 290.1 set on Jan. 25, it is still well below the high of 818.6 it set in March 2003 (the data series began January 2003).
Bottom line: Fear is up, but the credit market appears to remain sanguine about fundamentals for future corporate profits and cash flows.
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Tony Crescenzi Blog Mortgage Apps Holding Up 4/4/2007 1:21 PM EDT The best the bears can say is that the market is stagnant.
Tony Crescenzi Blog A Consumer Measure Slips 4/4/2007 11:36 AM EDT If the downtrend in the ABC News survey continues, it could forecast slippage in consumer spending.
Tony Crescenzi Blog ISM Lacks Support 4/4/2007 10:53 AM EDT This is a trend worth watching, given the importance of the service sector.
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market,
first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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