Credit Versus Equities: Investing Across the Capital Structure

Companies issue both debt and equity to finance their operations, and their valuations should be linked to the enterprise value of the firm. However, due to investor segmentation, the capital market imposes little discipline in valuing the two (contingent) claims in a consistent manner.

As a result, over the past 45 years, exposure to U.S. investment grade credit spreads had a Sharpe ratio that was roughly half of the Sharpe ratio of U.S. equities.