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"Something Unusual Is Happening" - The High Yield Of Investment Grade Debt

• by Kevin Muir

The American economy is clipping along at the best pace in a long while. Financial conditions are still easy. Not surprisingly, high-yield bond spreads are within spitting distance of recent tights (lows).

This is all to be expected in an environment of economic expansion.

Investment-grade not playing ball

As a macro guy, there is nothing unexplained with this picture. But I must admit, I don't follow the day-to-day movements of different parts of the bond market as much as I should. Luckily, I have friends at credit shops who recently brought to my attention the divergence between investment-grade OAS (Option Adjusted Spread) and high-yield OAS. For those not familiar with OAS, think about it as the spread you earn on top of the risk-free government rate for taking the credit risk of a corporate bond. For example, if government bonds yield 2.25% and the comparable high-yield index yields 5.50%, then the OAS is 3.25%.

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