Analysis of corporate bond & credit markets
The macroeconomic analysis of corporate bond markets typically is based on aggregate measures of growth, employment, interest rates and monetary policy. The impact of changes of these variables on corporate revenues and cash flows and thus on credit risk depends on financial and operating leverage and on the ratio of earnings or cash flows to net interest payments, that is, some measure for interest coverage.
The subject of valuation can be analyzed from various perspectives. Investors usually tend to compare current spreads with historical spreads. However, it is highly recommended to consider the stage of the credit cycle between then and now, when doing this. The results also should be adjusted for different compositions of the credit universe and a potential rating drift over time. Fundamental models for credit spreads implicitly take changes of the economic environment and consequently of the average ratings of the issuers into account. In other words, the outcome of this kind of models is a fair spread for corporate bonds with respect to the economic environment.
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