Stocks Likely to ‘Catch Up’ With Corporate Bonds
By David Wilson
Sept. 22 (Bloomberg) — Stocks offer greater value than bonds and are poised to “catch up” with a rally in corporate debt, according to Rod Smyth, chief investment strategist at Riverfront Investment Group LLC.
The difference in yield between corporates and 10-year Treasury notes has narrowed more quickly than the Standard & Poor’s 500 Index has risen since March. The yield comparison is based on a Moody’s Investors Service index of Baa-rated debt.
Since December, the yield gap has fallen to 2.9 percentage points from a peak of 6.2 points, according to data compiled by Bloomberg. This spread is near its lowest level since January 2008, when the S&P 500 was about 22 percent higher.
Spreads have narrowed so much that stocks have more room to rise than bonds, especially as earnings increase, it added.
Smyth isn’t the only strategist whose focus has shifted to shares. “Equities no longer look expensive relative to corporate bonds,” Andrew Garthwaite, a global strategist at Credit Suisse AG, wrote in a Sept. 18 report. He downgraded credit, or bonds, based on relative value.
Barry Knapp, a U.S. strategist at Barclays Capital, drew a similar conclusion last week. Stocks have more to gain from the economic recovery that’s now in progress, he wrote in a report dated Sept. 14.
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