The Tell: U.S. corporate bonds flash ‘green light’ for further stocks gains as equities soar in 2023

by | Jul 31, 2023 | Stock Market

The bond market is expressing confidence in company cash flows, flashing a sign of support for the stock market’s rally, according to DataTrek Research.  “U.S. corporate bond spreads continue to tighten and are now essentially the same as 2017 – 2019,” said Nicholas Colas, co-founder of DataTrek Research, in a note emailed Monday. “That is a green light for further stock market gains.”

Declining corporate bond spreads over comparable Treaurys signal rising confidence in future cash flows and earnings, said Colas. Both investment-grade and high-yield bonds have broadly seen their spreads tighten over the past few weeks to average levels seen in 2017 – 2019, when conditions in the economy were generally good, his note shows.  Investment-grade spreads averaged 1.19 percentage points over Treasurys over that stretch, while junk bonds averaged 3.82 percentage points, according to Colas’s research.  “This was a period of generally good economic conditions and just one hiccup in capital markets, namely when the Fed briefly overreached on rate policy in late 2018,” he said. This year, investment-grade bond spreads have recently declined to around 1.22 percentage points and those for high-yield debt have narrowed to 3.78%, the DataTrek note said.  “Corporate bond markets conti …

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