From Technical Analysis: CI=quality bond yield/average bond yield CI high --> implies bullish. It says: conversely yield spreads are narrowing when CI is bullish; I just dont get it how yield spreads are narrowing when CI is high. My explanation is: CI is high --> quality bond yield price down(yield high) and average bond price high (yield low). So if I take a difference of these 2 yields, yields are increasing (and not narrowing). Pl help me understand how how yield spreads are narrowing when CI is increasing. I am assuming yield spread = (high quality bond yield -low quality bond yield).
If high quality bond yields are, lets say, 3% versus yields on average bonds, lets say, 10%. CI = 0.03 / 0.10 = 0.3 If investors are bullish, this index will increase because investors will buy average bonds so yield drops to, lets say, 8%, and sell high quality bonds so yields increases to, lets say, 4%. Therefore, CI = 0.04 / 0.08 = 0.5. So, yields are narrowing and the CI is rising = BULLISH.
ah. that was very clear. thx Thommo