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.

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Here comes the summer sun…

Markets play it cool... Equities in the US into record territory, rates giving up some of their stellar gains and IG credit spreads at levels not seen since May 2018. A dovish Fed has laid the foundations for a rate cut at the end of month FOMC meeting, and the ECB looks as if they will also cut the deposit rate and/or announce a new QE programme. Equities will get a further [...]

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Liquidity aplenty, but expensive to hold

... and greater risks emerging Until the late pull back when markets were undermined by the minutiae of the timing of any Fed rate cut, it was looking fantastic. Actually, we don't think it changes much and it is looking very good still. We're in the midst of the mightiest bond grabfest in history. We have record low bond yields. Corporate funding costs are collapsing. The S [...]

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Treading water

Keeping the faith... The euphoria of the month's opening session hit a brick wall, leaving us with what could best be described as a more reflective day for the most part. Hopes and positive soundbites driving markets higher were replaced by the need for something more concrete to emerge from any US-Sino talks. Markets were treading water. Macro is in need of a boost and hel [...]

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