Barron’s Confidence Index shows worrying decline

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When reporting on the unfolding of the credit crisis I often referred to the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds.

The difference between the yields is indicative of investor confidence. A rising ratio indicates bond investors are growing more confident, in other words preferring more speculative bonds over high-grade bonds. On the other hand, a declining ratio indicates investors are demanding a lower premium in yield for increased risk. That shows a waning confidence in the economy.

Since hitting an all-time low in December 2008, the Index was almost back to pre-crisis levels in January this year as investors grew increasingly confident. But that was when investors started focusing on sovereigns that were starting to get into trouble.

Since the start of 2011 the Index has given up more than 40% of its gains. This puts us back at levels experienced during mid-2008 – just prior to confidence falling off a cliff. Based purely on this chart, one has to conclude that confidence remains fragile.

Source: Barron’s

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