- HYG rests at resistance & LQD at support.
- Tomorrow’s trade activity will say a lot for the pair, but momentum favors spread tightening.
Back in December, I paired a long High Yield (HYG) position with a short Investment Grade (LQD) because I saw confirmation of a divergence. The trade has worked out famously, reaping 2.95% total return to date (including dividends/interest):
Tonight, I wanted to update the progress of this pair for a few reasons. First, the story of High Yield/Investment Grade spread tightening is gathering a lot of attention in the mainstream. More importantly, both LQD & HYG rest on key technical levels as of tonight’s close.
LQD is resting on a huge support at $107, having closed at 107.23 with a VWAP around 107.08. Today’s trading session opened with LQD immediately bouncing off 106.88, the same intraday bounce we saw midday in the previous trading session. Extending the chart, I find that this is crucial price level for LQD to maintain:
Conversely, HYG not only bumped resistance throught this morning, but it actually broke through $92 in the end of today’s session, closing up at 92.04… one cent off the post-Lehman high it set minutes prior.
That $107 support for LQD was my price target when we opened this pair. Further, $92 was the critical 2nd resistance I had envisioned for HYG. (It should be mentioned that I wasn’t as inclined to expect absolute return from our HYG long as relative return against the LQD short.)
I fully expect momentum to prevail throughout the trading day tomorrow, but given the superior risk-adjusted returns we’ve reaped from this trade, I’ll be quick to shut it down. I’ll post updates via the Trading Desk.