Credit

IG vs HY Spreads

The relationship between investment-grade and high-yield credit spreads — a barometer of risk appetite and recession probability.

Definition

Investment grade (IG) bonds are rated BBB- or higher; high yield (HY) is BB+ and below. The HY/IG ratio (or HY minus IG difference) compresses in risk-on regimes and expands sharply when default risk rises.

A rising HY-IG ratio with stable IG spreads signals isolated credit stress; both widening together signals systemic risk-off.

Why it matters

The HY/IG relationship is one of the cleanest cross-sectional reads on whether stress is broad or concentrated.

Worked example

Q4 2018: HY spreads widened 250bp while IG widened only 35bp — a high-beta sell-off rather than systemic stress. The Powell pivot in early 2019 normalized the ratio.

Frequently asked

Which is more sensitive to rates?⌄

IG has higher duration and is more rate-sensitive; HY is more credit-sensitive and tracks equities more closely.

What's a healthy HY/IG ratio?⌄

Historically 3–4x; persistent moves above 5x suggest late-cycle euphoria reversing.

Do BBB-rated bonds count as IG?⌄

Yes, but they're the most downgrade-sensitive — a 'fallen angels' wave can swell HY supply quickly.

Where does private credit fit?⌄

Outside both indices, but its mark-to-market lag means public-credit spreads lead private valuations.

Related terms

Credit Spread

Credit

OAS (Option-Adjusted Spread)

Credit

Default Cycle

Credit

Market Contagion

Macro

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