We only need to watch two things now. First, we need to know whether OAS levels are rising or falling, corresponding to increasing or decreasing corporate stress levels. Stock prices benefit from lower OAS levels.

The second thing stock investors want to see is increasing steepness of corporate yield curves relative to the Treasury yield curve, especially at lower credit rating levels. This indicates strong credit demand, a measure of health, in the corporate sector.

The Present Situation

The chart below depicts yield curves for the Treasury, for swap yields, for two high-yield grades (B and BB) and four different investment grades; I wrote a column relating these ratings to corporate size last December. Please note that while the Treasury curve is inverted, each step down the credit-quality curve leads to a more positively sloped yield curve. This is as it should be; investors should demand additional yield to compensate for both longer maturities and lower qualities.

Comparative Yield Curves March 16, 2007

Click here for larger image.

Source: Bloomberg, Howard Simons