The gap in confidence levels between corporate bonds and equity markets is at its widest since March 2008 when the global financial crisis was deepening, the Financial Times reports.
The business daily said that analysts at Bank of America Merrill Lynch have recorded that investment-grade bond yields and equity volatility, which gauge investor sentiment in their respective markets, are further apart than at any time since March 2008. The US equity markets moved sharply lower over subsequent months.
“If I was an equity investors I would pay close attention to what’s going on in the corporate bond market, probably more than they are currently,” BofA credit strategist Hans Mikkelsen told the FT.
BofA’s corporate bond index shows that the gap between yields on investment-grade corporate bonds and US government bonds has moved to 164 basis points. This results in the difference between credit spreads per point of equity volatility to 10.26 basis points according to the bank’s calculations, its highest in more than seven years.
Growing pessimism in the bond markets comes as Dealogic reports that corporate debt issuance to date in 2015 indicates this year is on track to set a new record. However, the credit markets are signalling that if the Federal Reserve raises US interest rates next month as many expect, the equity markets will undergo a sell-off that triggers a rise in long-term borrowing costs.
