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The hurt of red October

Key points

  • High yield underperformed investment grade in October but easily outperformed equity.
  • The high yield advantage over investment grade should not narrow further unless the correction turns into a bear market.
  • Oil has weighed on US high yield and FX hedging costs remain a headwind for US credit overall.
  • The European Central Bank buys euro credit with zest.

October spooks credit markets too

October was unkind to the reflation trade as high yield (HY) credit underperformed investment grade (IG) with the latter benefiting from its longer duration and the decline in interest rates due to the flight to safety (Exhibit 1). The performance advantage of HY over IG narrowed somewhat as a result but it remains a hefty 4.8% year-to-date. This advantage should not narrow much further this year unless the recent market correction morphs into a bear market. The losses in HY in October were a typical response to a material drawdown in equities (Exhibit 2), with the one silver lining that investors were again better protected in HY than in stocks during such a market correction (2.1% drawdown in US dollar (USD) HY vs 9.7% drawdown in the S&P500).


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