Wednesday, November 19, 2008

What's the Deal with Long Credit?

Below is a chart of the cumulative return of the Long Government Index (U.S Treasuries and agency securities with a maturity of 10+ years) divided by the Long Credit Index (Investment Grade U.S. corporate and specified foreign debentures with a maturity of 10+ years ) since 1978.


From 1978-2007, the two indices performance was remarkably similar, with Long Credit outpacing Treasuries during the bull equity market of the 1980's - 1990's and the "great moderation" we saw from 2003-2007 when risk could be given away, while Treasuries roared back during the period of stress in the early part of this decade (and the the current period of turmoil).

We are at levels truly never seen before, with credit outpacing treasuries by almost 35% over the past year and a half. Questions I keep asking myself:

  • Are an unprecedented amount of defaults on the way? Maybe...
  • Is the recovery value of a defaulted bond less than history would lead us to believe? Maybe...
  • Are long credit bonds yet another screaming buy? Maybe...
  • Or are Treasuries just flat out too darn expensive? Maybe...
Until I can answer a few of these better, I'll be keeping most of my money on the sideline.

Source: Barclays