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The question for the corporate bond market is how do we get to a situation where spreads are justified by credit quality? Research on the US corporate bond market suggests that a 20% increase in the average corporate’s cashflow is needed to justtify spreads.
The problem with 20% increases in cashflow is they don’t happen without rampant economic growth. And if the economy starts booming again two things are certain – equity prices will pick up and interest rates will be increased,
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