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. The decompression from the tights has been severe but we think has a little more to go in 2019 (less than 50bp though).

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.

So there’s a little more to think about. And investment in the asset class will be more measured, targeted and conservative.