The wider spread is partially justified by the weak nature of the recovery. Credit spreads are typically wider when economic conditions are poor, as investors demand a higher yield to compensate for the increased default risk. However, even after accounting for the recent softening in most economic data, high yield spreads look wide.
The real culprit for the wide spreads may be the Fed holding down long-term Treasury yields. As long as the current monetary policy continues, fixed-income investors are still faced with the same difficult choice: either accept more risk–in the form of longer duration or more credit exposure–or settle for historically low yields. For those unwilling or unable to settle, investment grade could be one of the better bargains on a risk-adjusted basis.
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.
Full disclosure: Tom Lydon’s clients own LQD.