Lesson 5 of 7 · 13 min
Why spreads move: macro and issuer factors
Yield spreads widen when the credit cycle turns down, when markets fear risk or lack funding, and when a specific issuer's coverage or leverage deteriorates; high-yield spreads move the most.
In short
- Credit spread risk: the risk of greater expected loss as credit conditions change for macroeconomic, market or issuer-specific reasons.
- Spreads are narrowest near the top of the credit cycle and widest near the bottom.
- Yields are lower for higher ratings and generally higher for longer maturities; the gap between IG and HY is wider than the gaps between IG notches.
- HY spreads react more to the cycle, widen sharply in a flight to quality, and can suffer liquidity stress. Reasons to hold HY: diversification, capital appreciation, equity-like return with lower volatility.
- Other systematic drivers: dealer capital costs, funding stress, and new-issue supply versus demand. Issuer-specific drivers: coverage and leverage, judged against peers.
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