Following the recent comments of Yale's endowment investment chief, David Swensen (see previous post), over half of a group of recently surveyed asset managers believe that high-quality corporate credit is currently trading at cheap levels and will likely rally in 2009 (see Financial Times article). Many feel that the rush to the safety of Treasuries has caused all grades of corporates, even high-grade bonds, to be oversold. On the other hand, many of the same analysts, including Pimco's Mohamed El-Erian, feel that US Treasuries will face considerable pressure after their recent fear-driven price appreciation, which in some cases drove yields to near zero levels for some shorter duration issues. Given the current desire by the incoming Congress and the President-elect to fund numerous public sector and infrastructure projects, the government will be forced to increase its issuance of debt, putting further pressure on Treasury prices.

As recently reported by IndexUniverse.com, in the last few months the yields on Treasuries have been rising, while yields on corporate bonds have been falling, signaling a shift from Treasuries to corporate bonds. But does this imply that investors are no longer worrying about the economy and therefore don't feel that they need the safety of Treasuries? Are investors simply sector shifting into corporate bonds? Closer inspection shows that while investment grade corporate bond yields have fallen recently (junk bond yields have fallen more), investment-grade corporate yields have actually remained relatively steady over the last year as Treasuries prices fell and their yields increased. Furthermore, even with the recent sell-off of Treasuries, the spreads between investment-grade corporate bonds and Treasuries is still above historical averages, signaling that there are still better deals in investment-grade corporates and that the sector shift is not complete. Rotation is also being suggested in part due to a belief that if Treasury yields do continue to rise, prices could fall much further and change much quicker than corporate bonds on average given that Treasury yields have been down so much in the last year, suggesting prices have gotten ahead of themselves.