Spectrum Asset Management has analysed the Australian corporate bond market, in an effort to explain why it - unlike other asset classes - currently represents fair value for investors."Credit spreads - the extra margin for default risk - are now notably lower than averages. But so too are expected default rates. Putting these two factors together makes the Australian dollar denominated corporate bond market, overall, appear around fair value to us," wrote Damien Woods, principal at Spectrum AM. "The assertion that credit spreads are below historical average and hence a bad investment is poor investment analysis," he said. "Comparing credit spreads to averages tells us little about the merit of investing in the corporate bond sector. "Assessing whether current credit spreads adequately capture future losses is more important."Woods noted that the long term average default rates for sub-investment grade default rates are a little over 4.0 per cent, while Moody's reported that global speculative grade annualised defaults fell from 4.8 per cent in August 2016 to 2.9 per cent in August 2017. "More importantly the rating agency forecasts they will fall to 2.3 per cent by August 2018," he said. "Hence, if defaults are lower than average and expected to fall further, it makes sense to Spectrum that the margins for default risk are lower than the average as well.""Most segments of credit markets can withstand risk-return analysis to justify current valuations. The riskiest part of international debt markets - peripheral emerging sovereigns and CCC rated bonds - look fully valued, at best," Woods surmised.This is a trend that has been well-observed by Philip Bayley, principal of ADCM Services. "Credit spreads have been contracting in the domestic market since the beginning of 2016, although the pace of contraction appears to have moderated in recent months," Bayley said. "The chase for yield can only go so far and any move to start raising interest rates will remove some of that pressure."With the unwinding from next month of the US Fed's massive bond portfolio, built up during QE, and with the FOMC expected to increase the official cash rate again in December, it is possible that spread contraction may be coming to an end, he suggested.  "Credit spread contraction may be slower to ease in the domestic market, especially while the RBA keeps the cash rate on hold. Supply constraints may also have an impact, especially in the ASX-listed sector," Bayley said.