Are corporate bonds still profitable?
Valuations are always relative. This applies to both equity and bond markets. The benchmark is usually the “risk-free” investment. The risk premium for corporate bonds, also known as the credit spread, is widely used as a common valuation indicator for corporate bonds. But how should this credit spread generally be categorised and what does the current spread level tell us about whether corporate bonds are attractive or not?
Spreads on corporate bonds can be assessed from two perspectives: 1) in comparison to the historical level and 2) in comparison to the expected default rate. Depending on the perspective, different conclusions can be drawn.
