Arbitrage Alert: US-Europe High-Yield Spread Divergence At 2009 Global Financial Crisis Levels

Data from Intercontinental Exchange (ICE) indicates a potential arbitrage opportunity in the bond market. U.S. corporate bonds rated CCC and below currently offer an average yield of 13.47%, whereas yields on European high-yield bonds are significantly higher, presenting a notable margin. This situation could represent a viable fixed-income arbitrage opportunity for bond investors.

A Financial Times report indicated that recessionary fears in Europe have driven the yields of high-yield bonds to higher levels. Recently, PIMCO’s CIO Daniel Ivascyn warned investors about a strong chance of a significant economic downturn in the U.K. next year. “There’s potentially more hard landing risks,” he said.

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Yields on lower-rated debt tend to rise amid economic uncertainties and downturns, as borrowers demand more for the higher risk factor at play.

With risks of a recession rising in Europe, the economy’s riskiest corporate bonds (rated CCC and lower) are now trading at an average yield of 19.66%, according to ICE data. This translates to a spread of more than 18% over government debt yield.

Relatively, similar-rated U.S. high-yield corporate bonds are trading at an average yield of 13.47% and offering a much smaller spread of under 9% to U.S. Treasury bonds.

This month, the gap between the high-yield bond spreads of the two economies has reached its widest point since the global financial crisis in 2009. This divergence highlights the contrasting investor sentiments towards these regions and also suggests a potential arbitrage opportunity.

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