In the 1980s, no actor was tougher or more intimidating than Mr. T, who was made famous by his role as the hard-hitting Clubber Lang in Rocky III (“What’s your prediction for the fight? Prediction? Yes, prediction. Pain.”). Mr. T also starred in “The A Team,” one of the great TV shows of all time, as B.A. Baracus. And if you doubt the greatness of “The A Team” consider the catchphrase of George Peppard’s character, Hannibal Smith: “I love it when a plan comes together” (all great TV shows have a great catchphrase). The bad guys would tremble before B.A. – which brings us to the point of this week’s Weekly Wire: Moody’s seasoned Baa Corporate Bond Yield Relative to the Yield on the US 10 Note, also known as the Baa spread.
By way of background, bonds rated Baa by Moody’s occupy the lowest rung on the investment grade ladder. When the yield spread between Baa bonds and the U.S. 10 Year Note is wide it means investors are pessimistic on the asset class and the economy (maybe too pessimistic), and when the spread is narrow it means investors are optimistic on the asset class and the economy (maybe too optimistic). Well, that spread, which hit over 400 basis points or 4% in early 2020 has narrowed to 210 basis points or 2.1%, leading some market pundits to posit investors are too bullish on the asset class and the economy.
We don’t share that point of view. While the spread has narrowed dramatically as corporate bonds have rallied, it has been much narrower in the past (as recently as 2018 and for a very long stretch in the 1990s) and is reflective of both a resurgent economy and extraordinarily supportive monetary policy.
As the economy continues to recover, we think corporate bonds can continue to perform well. And as a firm that has always worked with and for financial advisors, we just hope some advisor somewhere, when delivering a financial plan to a client or a prospective client, says, “I love it when a plan comes together” – sorry we couldn’t help ourselves.
Tagged: Tim Holland, weekly wire, market perspectives, Moody's, Baa Corporate Bond Yield