AudioCodes Ltd. (AUDC)

Daily Spotlight: Bond Spreads NarrowingTreasury bond yields have been rising in recent weeks on concerns that inflation may not be as transitory as earlier thought. Corporate bond yields have meanwhile declined, as investors are now more optimistic about the potential for lower default rates. As a consequence, spreads between corporate and Treasury bond yields have continued to narrow. The spread between AAA-rated corporate bonds and 10-year government bonds in December was 66 basis points, below the 35-year average of 108 bps and down 20 bps from August. The gap between the government 10-year bond yield and a BAA-rated bond (still investment grade) in December was 172 basis points, below the historical average spread of 232 bps and down more than 20 basis points from August. From a risk-management standpoint, we watch these spreads closely to gauge the bond market's view of corporate financial strength, which appears to be improving given the narrowing spreads. From an investment standpoint, we think that corporate bonds are prices above fair value, and in this environment favor inflation-indexed fixed-income securities such as TIPs.