Investment Grade (IG) Corporate yield spreads to U.S. treasuries have remained in a tightening trend for 2017 helping to provide positive excess returns.
Although spreads appear fully valued, we expect spreads to tighten somewhat into the year-end due to strong corporate earnings which are improving credit metrics for IG companies.
Source: Citigroup Research, 10/12/07-10/11/17. For illustrative purposes only and not indicative of any investment.
1Option-adjusted spread is the spread relative to a risk-free interest rate, usually measured in basis points, that equates the theoretical present value of a series of uncertain cash flows of an instrument to its current market price. OAS can be viewed as the compensation an investor receives for assuming a variety of risks (e.g. liquidity premium, default risk, model risk), net of the cost of any embedded options. A larger OAS implies a greater return for greater risks.