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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Rabbit out of the hat

Credit not the only winner... Mario Draghi is a magician. There's little doubt left. Judging by the post-ECB rally in risk assets, the great conjurer has pulled it off again. Increasing Eurozone wage growth, the Chinese relenting on pork imports (out of necessity, in our view) amid rising trade-tariff optimism, US retail sales on the up in August and no-Brexit all fed into t [...]

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Draghi: No happy ending

HY/IG compression: Shades of 2016... The President of the central bank might have been a little schackled, but Draghi largely likely got his way in finding some middle ground, enabling him to keep the doves and hawks both content. A compromise 10bp cut on the deposit facility to -0.50% - as well as a tiering system for banks' holding of excess liquidity - and €20bn of QE f [...]

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Boneheads? Hmmm, quite

More sticky plaster, please... Negative rates are not natural and nature has a habit of expunging such aberrations. So, an ECB 20bp rate cut must be in the bag! All that's left to ponder is whether any accompanying QE is for €15bn to calm the dissenters, or €30bn to give the markets a turbo boost. For investors, we think it's a case of 'buy the rumour, sell the fact' [...]

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