Wednesday, June 9, 2010 6 comments

Thought of the day: Which is overvalued - junk bonds or stocks?

I ran across an interesting article in The Globe & Mail today. The article refers to research from Montreal-based firm, Brockhouse Cooper, pointing out that junk bond yields and stock yields are almost about to touch. That hasn't happened in over 25 years:

So this begs the question: which is overvalued? Junk bonds? Or stocks? Or is it both?

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6 Response to Thought of the day: Which is overvalued - junk bonds or stocks?

June 9, 2010 at 8:03 PM

if you price a stock as a perpetuity and consider only a fraction of S&P500 stocks are from "junk" companies, then the high yield bonds are overvalued relatively to S&P500 stocks.

investors are losing confidence, so go to bonds, even junk and shun stocks.

David Merkel
June 10, 2010 at 12:22 AM

jrm is right.  no need to add.

Parker Bohn
June 11, 2010 at 10:39 AM

I don't know much about corporate bonds vs the market, but there is a third alternative:

Perhaps those forward yields are wrong.

There are definite problems in using forward earnings to value the stock market, not least among them being that analysts and investors tend to both turn optimistic or pessimistic at the same time, in a kind of self-validating feedback loop.

Sivaram Velauthapillai
June 12, 2010 at 10:21 PM

Thanks for the comments everyone... it's certainly an unusual situation. As Parker Bohn speculates, forward stock yields may be wrong too...

June 14, 2010 at 4:58 AM

I think even bonds are overpriced now. 
Btw, what platforms do you trade on? Are you based in US?

Sivaram Velauthapillai
June 17, 2010 at 9:19 AM

It'll be interesting to see what happens to corporate bonds...

I don't trade. I'm just a small investor with a small portfolio... I just use my discount brokerages so nothing special... I'm located in Canada and I use the discount brokerages of CIBC and HSBC.

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