Ford Motor Co., based in Dearborn, Michigan, sold notes at 5 percent in April, the second-lowest coupon at the time for speculative-grade issues in 2011, Bloomberg data show. The second-largest American automaker has an earnings yield of 13.77 percent, using profit from the past year.

R.R. Donnelley & Sons Co. sold $600 million of seven-year, 7.25 percent notes on May 17, a day after the commercial printer's debt rating was cut to junk. The Chicago-based company founded in 1864 has an earnings yield of 8.37 percent, Bloomberg data show.

John Paulson, whose New York-based hedge fund Paulson & Co. made about $5 billion in 2010, cited the spread between profit yield and U.S. Treasury rates as a reason to be bullish in a January letter to investors obtained by Bloomberg News.

Fed Model

The comparison is a variation on the so-called Fed model, which Edward Yardeni derived from a July 1997 report that showed the central bank used the technique to compare equity and Treasury valuations. Yardeni, who worked for Deutsche Bank AG at the time, now runs Yardeni Research Inc. in New York.

The S&P 500's dividend yield, another valuation gauge, overtook rates on 10-year Treasuries in November 2008 for the first time since 1958. That preceded the start of a two-year bull market in equities that gave the S&P 500 a 111 percent return while Treasuries gained 6.1 percent, data compiled by Bloomberg and Barclays show.

"We don't see a lot of potential in the credit market," Zurich-based Thomas Steinemann, the chief strategist at Vontobel Asset Management Ltd., whose team helps oversee about $80 billion and doesn't hold high-yield bonds, said in a May 26 telephone interview. "The Damocles' sword of a Greek default may kill all risk assets, but the argument until then is in favor of equities."

Flawed Techniques

Valuation techniques that assume profits won't change over time are flawed, and high-yield bonds are a preferable investment to equities, said Andrew Milligan, who helps oversee $262 billion as Edinburgh-based head of global strategy at Standard Life Investments Ltd.

The S&P 500 was trading at 17.3 times annual profits at the end of 2007, near its historical average valuation after companies earned $84.67 a share. Compared with net income in the following year, when more than $2 trillion in credit losses spurred the first global recession since World War II and pushed earnings down to $60.57 a share, the multiple was 24.2.

"The Fed model works sometimes, and sometimes it doesn't," said Milligan, whose firm is "neutral" on equities and "overweight" junk bonds. "Corporate bonds are well protected at the moment. Companies have very good cash levels, and defaults are very low."

Profit gains have kept valuations below their historical average. Per-share earnings in the index jumped 36 percent to $84.58 in 2010, Bloomberg data show.