Corporate bond spreads or the difference between investment grade (Aaa rated) and high yield (Bbb rated) are currently 80 basis points. They last reached these low levels in October 2007 at 79 basis points.

When this spread comes down to such low levels it signals an overbought corporate bond market as high yield debt no longer lives up to its name. Similar to the "dash for trash" in equity tops.

Bbb rated corporate debt yields peaked in October 2008 at 9.49% and now yield 5.83% (a 38.6% drop in yield). The following chart shows the inverse relationship between Aaa / Bbb spreads and the SPX.

By Tony Pallotta

http://macrostory.com/

Bio: A Boston native, I now live in Denver, Colorado with my wife and two little girls. I trade for a living and primarily focus on options. I love selling theta and vega and taking the other side of a trade. I have a solid technical analysis background but much prefer the macro trade. Being able to combine both skills and an understanding of my "emotional capital" has helped me in my career.

© 2011 Copyright Tony Pallotta - Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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