DEFINITION of 'Barron's Confidence Index'

A confidence indicator calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence.

A rising ratio indicates investors are demanding a lower premium in yield for increased risk and so are showing confidence in the economy.

BREAKING DOWN 'Barron's Confidence Index'

The theory is that if investors are optimistic they are more likely to invest in the more speculative grade of bonds, driving yields downwards and the confidence index upwards. The opposite is true if investors are pessimistic.

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