15 months ago I wrote a piece called Expensive High Yield ? II. ?High yield is still expensive. ?I won’t post all of the regressions, but I have re-run them. ?The results are largely the same as before. ?Yields are low, and spreads are overly tight for everything except CCC bonds.

Much of this is the result of the Fed’s low fed funds rate and quantitative easing, which forces investors to take more risk. ?Another aspect is the strong equity market.

Also, CCC bonds offering opportunity may not adjust for the loosening of covenant protections. ?There is a tendency for investors to try to maintain yield levels while letting quality & covenants sag. ?In a low interest environment, with more and more people retiring, there is a growing desire for the simplicity of yield.

My conclusion last time was this:

All of the corporate bond market is expensive relative to history, perhaps excluding CCC bonds.? That?doesn’t?mean it can?t get more?expensive, particularly if stocks continue to move upward.?? But this won?t last for more than two years; the signs of speculation are here, and that should make us cautious.

As a result, I am investing my bond strategy cautiously now.? What little yield I get comes from emerging market sovereigns.? Credit risk from corporates is small.

Well, I blew it with emerging markets; what a kick in the teeth. ?I would have been better off in high yield. ?As it is, for me and my bond clients, the strategy is?Fire and Ice. ?20% long Treasuries for deflation, 80% short credit instruments for inflation. ?So far, so good.

Be wary in this environment. ?So many are reaching for yield amid a weak economy with yields that are low relative to past trends. ?But also be aware that a rising stock market can support the corporate bond market. ?That has worked for the last two years, but it can’t work forever.