Comparing Corporate Debt Yields

It's interesting to compare different quality corporate debt yields. You can see that the yield spread between Aaa and Baa debt could be looked at as a "fear index." What's worth noting about it now is that the spread has remained unusually wide for over a year and a half.

Moody's Baa Yield / Aaa Yield, Monthly Chart

You have to go back to the early 1980's to see the last time that the spread was equally wide. If you had the guts to buy stocks or bonds at that time you would have caught the start of a 20-year bull market in financial assets. Of course few people were interested in buying stocks or bonds then -- they were too busy buying gold and stocking up on canned goods. Crisis investing, indeed.

Moody's Baa Yield / Aaa Yield, Monthly Chart, 1980s

And looking at the 1970's you can see that the 20% premium level was hit in late 1970 and again in late '74 / early '75, both decent times to buy stocks. Recall Buffett's famous quote in the November 1, 1974 issue of Forbes: "[I feel] like an oversexed guy in a whorehouse. This is the time to start investing."

One note of caution before you get too excited about using this contrary indicator is that there's nothing magic about the 20% level. Wide yield spreads can get wider... during the Depression the Baa/Aaa yield ratio widened to 80%+. Scary times can get scarier.

Moody's Baa Yield / Aaa Yield, Monthly Chart, 1970s

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