It's not just the US stocks that are expensive, the spread between US corporate bonds has hit the lowest level in 20 years, all because of the "soft landing" in the US
Due to optimism about the US economic outlook, investors are flocking to the corporate bond market, narrowing the spread between investment-grade corporate bonds and comparable US Treasuries to 0.83 percentage points, the smallest since March 2005
As investors increase their bets on a "soft landing" for the US economy, credit spreads have narrowed to a phase low.
According to media reports citing data from Bank of America, the spread between investment-grade corporate bonds and comparable US Treasuries has narrowed to 0.83 percentage points, the smallest since March 2005; the spread between high-yield and "junk" bonds and comparable US Treasuries is only 2.89 percentage points, the lowest level since mid-2007.
Credit spreads to some extent represent corporate default risk. Narrowing credit spreads mean higher bond prices, reflecting investors' generally optimistic outlook on the economic prospects.
Mike Scott, Global Head of High Yield Bonds at asset management firm Man Group, said:
"Broadly speaking, the market has almost fully priced in a 'soft landing'."
Bill Zox, Portfolio Manager at Brandywine Global Investment Management, stated that demand for corporate debt is exceeding new supply. He said:
"You will see huge demand for anything credit-related."
However, some fund managers have warned that buyers are focusing more on overall yield but overlooking the current spread levels that are unfavorable for hedging corporate default risk.
Lauren Wagandt, Portfolio Manager at T Rowe Price, cautioned that current corporate bonds are "too expensive":
"You need to have dry powder ready in case of potential volatility."
Ruben Hovhannisyan, Portfolio Manager at TCW, noted that this phenomenon reflects how "overbought the market is," stating that investors have "virtually no room for error."