Spreads stay contained
Spreads normalize
IG OAS near cycle lows
~74-79bps
· ~1st pctile of 20 yrs
How the credit-spread cycle prices the IGIB carry premium
IG corporate option-adjusted spread · 20-year range
stressed
long-run avg
cycle tights
4 · normalization risk:
mean reversion widens spreads
2 · IG OAS ~74-79bps
~1st pctile of 20 yrs · fully valued
1 · IGIB yield = Treasury yield piece +
credit/liquidity premium
IGIB
credit/liquidity
premium · ~1.1pp
Treasury yield piece
principal
no credit channel
VGIT
Treasury yield
principal
3 · spread = thin compensation
starts near cycle lows
5 · spread duration marks
IGIB principal down
6 · VGIT: Treasuries only —
zero spread-duration exposure
distribution yield
7
premium durable only if spreads stay contained
7
spreads normalize: premium and principal at risk · VGIT insulated