S&T Question: Why is IG quoted in bps spread and HY in price? Convention or something more?
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HY tends to trade much wider spread, often full points like 96 bid 98 offer vs basis points for IG. like 3.25% vs 3.26% (which might be 100 vs 100.06 a 5yr IG paper)
Also, lots of HY bonds have embedded options which makes the yield quote less meaningful (so you have both yield to matiruty, and yield to call..and if there are muliple calls..then you have a list of them) Yield is a calculated value...but regardless of which yield is the "right" one...the dollar price stays the same.
Ironchef's points are good. Additionally, investors are not typically worried about default risk with IG bonds (thus why they are IG), so you are more concerned with the return over Treasuries that you earn from holding the bond until you receive par at maturity (which is what spread tells you) as this is what your return is capped at. If a bond is HY, it has a higher chance of default than an IG bond, thus investors are concerned with dollar price to know what their upside/downside is in a variety of recovery scenarios should the company default on its obligations.
Adding to this point, spread / yields are calculated based off of the assumption that you get par back on the maturity date. If a deeply distressed issuer has a bond trading at $20, then the yield will be sky high but the odds of seeing that return are very low. Investors will instead come to a view on what the value of the company is and what recoveries will look like in different scenarios where the return is below par.
Very comprehensive. Tysm!
Credit traders hate themselves and everyone else in the world. They typically were not hugged enough as children. This is one of many ways in which they try to make themselves feel better.
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