Market graphic: spread decompression

Market Graphic

In February equity markets sold off, sparked by a significant drop in Chinese equities and followed by negative news out of the subprime mortgage market. In the corporate bond market, investment-grade and high-yield credit spreads widened as equities traded down, although investment grade underperformed high yield due to increased exposure to housing-related issuers.

From a historical standpoint, IG outperformed HY in 2003, 2004 and 2005. We estimate that a carry-neutral strategy involving

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