During the crash of 2008, solid companies were literally shut off from the credit markets and they vowed to never let it happen again. As a result, 2009 saw record corporate bond issuance, with demand outstripping supply and spreads between Treasurys and corporates tightening all the while. Spreads, a measure of the extra risk of owning corporate bonds instead of Treasurys, hit a trough early this year at 1.97 percentage points, and have since widened to 2.44 points. Still, high quality corporate bonds have been a good place to hide and even profit in the past two months.

Comparing 2008

Starting in the middle of May 2008, the iBoxx $ Investment Grade Corporate Bond Fund (NYSEArca: LQD) corrected about 7 percent from $106 to $99 into the middle of July. Equities over that time, as represented by the S&P 500 corrected from 1425 to 1200, or about 16 percent. Things were clearly correlated and, for those of you who remember, credit actually led stocks.

We now have a situation where high quality corporate debt has significantly outperformed equities despite the new dire outlook that equities in full blown correction mode might be suggesting. So what gives?

LQD Vs SPY

To continue with the 2008 comparison, the high for the S&P 500 this year was on April 26 around 1220. We have since corrected about 16.4 percent -- like in 2008. So how has credit preformed since April? LQD has rallied from 106.21 to 108.46, or about 2 percent. This could be a very interesting indication of the environment we’re in. The new “flight to safety,” as well as demand for income and reach for yield is driving investors to corporate debt, issued by companies hoarding high levels of cash.

A recent Bloomberg News article said that investment-grade companies have about $668 billion in cash on their balance sheets, up from $580 billion in the first quarter in 2009. Much of 2009’s issuance – about 30 percent of it -- was due to refinancing activity while the remaining debt sales were designed to shore up balance sheets, in part, for protection in the event of another credit shock.

Another reason for the rally, and probably the more compelling reason, is the relative outperformance of Treasury bonds. Treasurys of course, represent the benchmark yield for corporate financing rates, so if the cost of issuing debt goes down for U.S. Treasury, it goes down for companies as well -- minus the difference in the implied increase in credit risk of corporate debt.

The Barclays 20+ Year Treasury Bond Fund (NYSEArca: TLT), the long-dated Treasurys ETFfrom iShares, has spiked almost 17 percent from its low in April of $87.30 to $101.79. There’s also a credit rotation occurring from portfolio mangers moving up the credit curve exchanging lower-quality names – like the iBoxx $ High Yield Corporate Bond Fund (NYSEArca: HYG) to higher quality names.

This is interesting because it means that even with all the troubles in Spain and Europe, a break of a key technical support level – 1040 on the S&P 500; a bleak outlook for employment, and questions regarding further government stimulus, investors are accepting lower interest rates to lend to corporate America. LQD made a new high on Wednesday.

What to do with this information?

Obviously it depends on your time horizon and risk tolerance, but if you’re already a proud owner of LQD and have a much lower entry, there’s little harm holding here. Note that you are taking principal risk as a result of the liquidity you get and there are still many structural issues in the market. For example, regulators and exchanges are addressing what they think are the causes of the “Flash Crash,” but they have yet solve some of the core issues at the present.

But if you aren’t currently holding LQD, it’s probably not a good idea to chase here. The risk is that, in addition to structural markets issues and as deflationary forces continue to sink their teeth in, the implications for corporate credit won’t be good and spreads should widen, putting pressure on prices. As I alluded to above, something has to give, either equities are very wrong, or credit spreads are very misleading. Time will tell.

Corporate and Treasury Yields, and Spreads

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Chadd Bennett is a trader and former financial adviser specializing in fixed income. He worked at Bear Stearns when it collapsed, then joined Morgan Stanley Smith Barney.