Confidence Index

The confidence index (aka confidence indicator) is the ratio of high-grade corporate bond yields over other investment grade bond yields or stock yields. Barron's publishes a number of confidence indicators every week.

This technical indicator is predicated on the belief that market trends first appear in the bond market—as the yield spread between the 2 sets of bonds narrows, the confidence index increases. Note that the yield on higher grade bonds is lower than riskier bonds, so the confidence index will never be more than 1 and is expressed as a percentage. It is believed that the confidence index is a favorable portent to the stock market, because it indicates that investors are willing to accept a smaller risk premium for higher risk bonds; hence, their confidence in investing is increasing.