IG Spreads

What Are IG Spreads?

Investment grade (IG) spreads measure the extra yield on bonds issued by companies rated BBB-/Baa3 and above — the highest two-thirds of the credit quality spectrum. The benchmark is the ICE BofA US Corporate Index OAS. IG bonds are held by insurance companies, pension funds, and institutional investors who are constrained to investment-grade-only mandates.

IG vs HY: What They Tell You

IG spreads tend to be more sensitive to rate volatility and interest rate risk, while HY spreads are more sensitive to economic growth and default risk. A widening in IG spreads with stable HY spreads suggests rate-driven stress (e.g., duration concerns); widening in both suggests genuine credit and economic deterioration.

The BBB Problem

The BBB tier — the lowest rung of investment grade — has grown substantially since the GFC. These companies are the most vulnerable to downgrade to HY status ("fallen angels"). Forced selling by IG-mandate holders when a large issuer gets cut to HY can cause outsized spread moves and is a key systemic risk.

Typical Ranges

• Normal economy: 80–150 bps over Treasuries
• Mild stress: 150–250 bps
• Crisis: 300–500 bps (GFC peak ~600 bps)

What Drives IG Tighter

• Strong corporate balance sheets and earnings
• Low refinancing needs
• Central bank purchases (Fed bought IG corporate ETFs in 2020)
• Demand from yield-hungry overseas investors via hedged purchases

Practical Significance

IG spreads directly affect the cost of capital for blue-chip companies. A 100 bps widening on a $1 billion bond issuance adds $10 million in annual interest costs. Sustained IG widening reduces corporate buybacks, capex, and M&A activity — all of which influence equity markets.