Credit yields are now significantly higher than earnings yields on equities. HY bonds are currently yielding 8.5% and loans 10.4%. Meanwhile, earnings yield on equities ranges from 5.1% current to 7.5% when adjusted for the long term inflation expectations published by the FED.
Most of the increase in credit yields is attributable to rising rates. One of the fastest monetary tightening cycles in history have not yet triggered further credit spreads widening. Instead the current spreads remain close to their early 2022 levels. While impact of the central banks’ tightening on real economy remains uncertain, a relatively cheaper and safer credit is increasingly more attractive than equity.
