Diary of a Financier

High Yield & Investment Grade at Key Levels

In Capital Markets on Mon 7 Feb 2011 at 20:05
  • 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:

LQD daily- support @ 107. Technical indicators failed to rally & momentum now negative.

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.

HYG daily- closed above $92 resistance, with momentum indicators pointed up. I am following the trend being communicated by MACD, because it could be flashing signals of erosion.

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.


  1. […] currently holding an open pair trade for these two: long HYG v. short LQD.  I made an important post back on February 2 about an amazing coincidence in the pair, since LQD closed on support and […]


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