The hurt of red October

Also Interesting

• Food fights at the Fed and in the Leveraged Loan market
• Looking for Lessons
• CTA and Macro Strategies Diverge

Credit market monthly review

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).