US IG Corp. Bond versus MBS

The correlation between S&P500 as a equity market index and investment grade corporate bond spread usually is very high. In this year, the spread of corporate bond started to widen earlier as issuance increased ahead of possible federal funds rate hike by main companies in US. And recently, US equity index is tumbling as external worries deepen with especially China and EM economies. And current worries and weak equity market weigh on corporate bond price again.

The average OAS of IG corporate bonds in US increased above high in 2013 and the momentum seems very strong with persistent risk aversions. But, considering relatively solid US economies and ample cash in US companies without energy related, investment in this bond seems somewhat attractive to pursue higher yield.

White Line : S&P500 Index / Orange : IG Corp. OAS in Barcap US Agg.

In a relative view against high yield companies, IG companies' bond is undervalued.

Further more, considering MBS market, IG corporate bond seems more attractive.
The spread between these widened fast recently, which gives an advantage from higher yield of IG corporate bond, while MBS' low yield is reflecting solid housing market in US and residential market is predicted to maintain solid.

White Line : MBS OAS in Barcap US Agg. / Orange : IG Corp. OAS

Considering these prospects, I recommend OW in IG corporate bonds in US, except for energy-related companies, and UW in MBS pass through to enhance return from carry.