Lack of dispersion supports ‘up-in-quality’ bias


July 9, 2024

Portfolio manager Ian Horn looks at what investors can learn from comparing mean and median credit spreads, and explains why current market conditions favour quality over beta.

An investor recently asked me whether it is useful to consider mean and median spreads when looking at credit valuations. The chart and comments that follow are a response to that question and highlight a theme we have discussed a lot recently.

Specifically, credit spreads in European investment grade have remained wide of their historic levels, but spread premia ­― how much more you get paid for additional risk ― are compressed.

Comparing mean and median spreads is a useful way to show relative levels of dispersion in the market. When dispersion is lower, spreads will be closer to a normal distribution. In such an environment, mean and median spreads will be similar.

However, when we have a fatter / longer tail of wider spreads ― which is what typically happens when dispersion is higher ― then the gap between the mean and the median will widen (the mean will be pulled higher by the wider data points).

Figure 1 is a plot of mean and median spreads over the last 14 quarters for European BBBs.

Figure 1 shows the exact point we’ve been trying to articulate. Broad BBB spreads are still wide of their pre-Federal Reserve and European Central Bank rate-hiking levels, and perhaps will stay here to reflect the recent uptick in political uncertainty. However, dispersion ― as measured by the difference between mean and median spreads ― has returned to pre-central bank hiking levels.

The conclusion, we would argue, is that whilst credit remains relatively attractive from a spread and yield perspective, investors should be cautious of reaching into the higher-beta parts of the market when spread premia are compressed. For our global strategies, we generally prefer US credit currently, but within our European allocations, we are gradually expressing an ‘up-in quality’ theme whilst staying fully invested.


“While credit remains relatively attractive, investors should be cautious of reaching into the higher-beta parts of the market when spread premia are compressed.” Ian Horn


This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co are as of July 2024 and may change without notice.


Index Descriptions

ER40 – The ICE BofA ML BBB Euro Corporate Index is a subset of the ICE BofA ML Euro Corporate Index (ER00) including all securities rated BBB1 through BBB3, inclusive.

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