Strong Corporate Bond Spreads already Partially Discounted

The incomprable Brian Reynolds over at Minyanville has pointed out on several occations that the strength in Corporate bonds should remain a positive for stocks...yesterday he pointed out that "In the short run, Treasuries will continue to have a big impact on equities, meaning stocks should continue to be nervous and choppy. But, in the longer run, the extraordinary strength in corporates is likely to be beneficial for stock prices because it increases the chances for more mergers buybacks and it has the potential to have hurt many bearish investors.

We have no idea when the media and equity traders will notice this improvement in corporates we have often pointed out that stock traders focus on what they can see, which is Treasuries investment bankers who notice corporates, and it can take some time for them to rev up buybacks."

While I agree with the theory, I would point out that broader measures of stock prices have already done very well.  The NYSE Index, which is also comprised of more interest sensitive stocks, has already hit new highs along with the strong corporate bond spreads.

The preceeding chart compares the NYSE Composite (NYA) to the spread between the Moody's Corporate Bond Yield and 10 year treasury yield.  It shows that the corporate bond spreads are as tight now as they were prior to 2000.  It also shows that the stock market has already responded to the strong move in corporate bonds.  The NYA is still trading very near all time highs as corporate bonds continue to rally.  But if the strength in corporates continues, the NYA should certainly start hitting new highs again. 

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