Rate Risk: An Issue for Investment Grade but Not High Yield
- By John Tierney
- 3 min read
Investment-grade and high-yield credit spreads are on the cusp of post-GFC tights. Many worry that rising inflation will push up Treasury yields in coming weeks or months. If that scenario worries you, is that incremental spread income (currently 95bp for IG; 325bp for high yield) worth the rate risk?
Short answer – probably yes for high yield but no for investment grade.
Correlations Are High for Investment Grade and Nonexistent for High Yield
In this exercise, we calculate weekly total returns for investment-grade and high-yield corporate indices and also for the five-year and 10-year constant maturity Treasury for the period 1990 to the present.[1] We then calculate correlations between the investment-grade and 10-year CMT returns and also between high-yield and five-year CMT returns, respectively.[2]
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