MSCI Inc

Finance a la shmoop...what is the baron's confidence index

well Barron's is an old-tiny publisher of Wall Street data and today it's a

stodgy magazine catering to sophisticated financial readers well the [Magazine of barron's confidence index]

magazine has fiercely opinionated readers and it began to take advantage

of them first with simple old-school polls managed by its journalists before

computers were really a thing and then it began to codify an index the densely

packed brain power that it was surveying as to where the markets and the world

was heading so one outcome of this outbound research effort was the bond [Bond index equalling Barron's confidence index]

index or Baron's confidence index which is calculated by dividing the average

yield to maturity on what is generally double-a and triple-a grade bonds by the

average yield to maturity on what is generally double B ish grade bonds got

it? So triple A double A over the triple B'ers.. Well why would

you do this strange calculation in the first place

well it reflects its audience's attitude about credit risk the presumption among

pretty much everyone is that the safe bet ie US government paper is just a [100 dollar bill stamped safe]

reflection of inflation more or less and everything else or at least all other

credit is pegged to that very safe US paper so it sets the standard against

which the riskier credit is measured it's stable since the Barron's index is

a bond risk index it is in essence a calculation of its audience's confidence

in the US economy relative to everything else generally speaking in a good or

growing economy there are very few bankruptcies or defaults why well partly

just because times are good and people are buying you know stuff [People walking in a shopping mall]

yeah even stuff like that and if a given company individually stumbles well there

are often competitors who are doing well and who would likely acquire that

company maybe not for a huge premium but at least they'd pay off the company's

debt so it would be money good right for those triple B's so it's bonds even if

lowly rated would go back to par and everyone would get paid off as planned [company and competitor smiling]

so the index isn't an absolute measure of anything really it has to be viewed

relative to wherever it was trading last week

last month last year when investors are confident the spreads for bond yields

are narrower and the ratio is higher.. well think about the intermediate

bond yields but when the ratio is high and increasing it means that faith and [Bond yield graph appears]

the economy is growing right because that denominator yield shrinks because

grade triple B's instead of having to yield 12 percent yield like ten or eight

and inversely the ratio is lower and decreasing demonstrating less faith in

the economy when things go the other way and when the economy is really in the

toilet well expect to hear a lot of this sound [Tumbleweed flies past a man in a clothing store]