The yield premium that investors demand to buy riskier bonds has dropped below 3 percent this month, its lowest level in 13 years, signaling investors’ growing confidence in a broad and strong economic recovery.
The yield premium is the extra interest investors charge on a high-risk bond compared to that paid by U.S. Treasury securities.
The yield spread fell as low as 2.90 points this month, a level not seen since it plunged to 2.33 percent in December 2007.
Yields on low-rated corporate bonds climbed to 4.42 percent on 6 November, the day before Pfizer announced encouraging results from its vaccine trials. The rate eased to 3.89 percent in February and stood at 2.98 on 22 April.
The premium shrank in light of economic data showing consumers are buying goods again and signs that spending on services such as travel will follow this summer.
Yet, if the interest rate spread were based on current market realities, it would be twice what it is, Marty Fridson, chief investment officer at Lehmann Livian Fridson Advisors, contended in comments to the Wall Street Journal.
He cites U.S. Federal Reserve figures showing that factories, mines, and utilities were producing at 74 percent of their capacities in March, compared to more than 81 percent in 2007 when the spread was at a comparable level.
That indicates investors believe the Fed will continue holding down rates to shield speculators from losses, he said.
Others justify the low spread by looking at the short-term economic trajectory instead of current conditions.
Consumers are “sitting on tons of cash” and the federal government continues its stimulus spending, chief economist Aneta Markowska at Jeffries LLC, told the WSJ.
Once short-term supply-chain kinks are ironed out, factories could be working at 80 percent of capacity or more this summer to meet current demand, she said.
TREND FORECAST: While the Federal Reserve chair Powell signaled that although interest rates will move above 2 percent this year they will not raise rates, we disagree. We forecast true inflation will rise well above 2 percent and the Fed will raise rates. And when rates hit 2 percent, equity markets will crash and the house buying spree will end.
