Here is something to consider. If there was really a problem from a fundamental perspective in the US (lower corporate earnings and cash flows) then shouldn’t we have already seen a dramatic rise in distressed corporate debt? The chart below is the TRACE Index. It is an index of the number of bonds that are trading in a distressed state. “Distressed” refers to a condition where a bond trades in excess of 1000bpts above yields of US treasuries (i.e. bonds that are in real deep trouble). Unless I am missing something (and it has happened before) there does not appear to be any breakout in the number of bonds trading in a distressed state. Can we logically conclude that there is not a problem with the recovery in the US economy? Could we also conclude that the rush into US treasuries is merely the result of panic which is not fundamentally justified! We think so.
