Having discussed some of the most influential economy-wide factors for the performance of corporate bonds, we will now examine specific indicators for the state of the US corporate sector. Traditional metrics of leverage focus on the debt-to-equity ratio. The rationale behind this is that a company’s assets are funded by a combination of debt and equity. Since the value of a company’s debt remains relatively stable over time, the debt-toequity ratio is extremely sensitive to fluctuations in the market value of equity in the short to medium term. High equity valuations, for example, lead to a significant underestimation of leverage. Using historical cost for equities can help to mitigate this problem. Yet, the issuance of new equity at inflated valuation levels still distorts the metric.
