HY-IG Spread Difference

This high yield minus investment grade spread difference chart is updated monthly

The ECB’s participation in the corporate bond market through its QE had a profound impact on the differential in spreads between HY and IG markets.

As the chart shows, we saw a huge compression in spreads to record tights between the two asset classes (159bp). In 2018, the underperformance in the high yield market versus the investment grade one left us with a difference rising to 350bp at year-end.

There will be a continued need from investors for yield amid low policy and market rates. But weakness in the economy will leave investors reluctant to support high yield corporate risk as they might have done previously.

The push nevertheless might just come from the ECB as the central bank embarks on a renewed QE programme and eventually force investors back into the high yield market. The difference in spread between the two markets started 2019 at 350bp and currently stands at 292bp (October 2019), with some further compression potentially seeing it head for 250bp.

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