Here’s an “Interesting” Way to Measure Market Sentiment

Hi everyone, and welcome to the December issue.

Now, there are many, many ways of measuring sentiment. Let’s take a look at one example, which shows something very interesting.

One way of measuring sentiment is through the relationship between junk bonds and higher quality, investment-grade corporate bonds. The well-worn method of doing this is by looking at the difference in yield between the two, commonly known as the “spread.”

Currently, the yield spread is showing positive sentiment but not extremely so. However, what if we look at the yield ratio instead? This makes sense because it essentially normalizes the relationship, to take account of the movement and risk-free yield levels.

This chart shows an investment-grade bond index yield divided by a junk bond index yield. Notice how it has tended to peak at times of very bullish sentiment and troughed at times of very bearish sentiment.

It hit an historic nadir in 2020, at the time of the COVID panic, and has recovered since.

But where is it now? You might be surprised to find out, and it gives us a clear message as to what to expect.

Enjoy the issue, and rest up during December. 2024 has the potential to be a year for the history books.