Valuation Series Vol. 2: Corporate Bond Yield PE Proxy

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There can be a good deal to gather from the spread on sound corporate bonds vs. a riskless treasury. Currently at 1.26%, with the treasury at 2.32% we find that the yield on these bonds is obviously 3.58. Now here is where the indicator comes in: If you flip the yield, you now have a sort of price/earnings ratio for corporate bonds. This is somewhat of a proxy for relative valuation to stocks.

When flipped, this P/E Ratio for corporate bonds becomes roughly 28. Based on this back-of -the-envelope calculation, we find another reason that stocks are not horribly valued It is obvious, though, that the chart below shows stocks disconnected to this ratio for reasonably long periods of time.

CORP PE v SPX PE.png

Much like theory, stocks do have an intrinsic value, but rarely does it actually cross the street at exactly that point. As evidenced above, these two measurements share the same value, but for years at a time this may not be so. As Benjamin Graham said, markets are a voting machine in the short-term and a weighing machine in the long-term.

Sources: FRED, Bloomberg

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