baa aaa quality spread
What it checks
The gap between the worst investment-grade corporate bond yield (BAA) and the best (AAA) is the within-IG quality margin. When that gap widens, lower-quality investment-grade corporates underperform for 3 months. Distinct from the BAA-Treasury spread.
Mechanism
BAA - AAA is the within-investment-grade quality spread. Fama-French 1989 document that widening BAA-AAA signals deteriorating economic conditions and rising default-risk premium for the lower-grade IG tier; leveraged-balance-sheet names underperform.
Signal rule
(BAA10Y - AAA10Y) 6m z>=+1.5 + 60d downtrend fires SHORT 63d; z<=-1 + uptrend fires LONG 63d.
Data dependencies
daily_pricesAdjusted-close OHLCV for every US-listed ticker; primary price feed.
fred_macroWorker data table, see services/worker schema.
Expected edge
- Paper alpha
- +/-3 to +/-5% over 63d
- Paper window
- T+1 to T+63d
Fama-French 1989; ~3-5% over 6-12mo on extreme quality-spread regimes.
Related families
credit spread shockMacroGilchrist-Zakrajsek 2012 AER show the excess-bond-premium component of credit spreads predicts equity returns at 1-3mo horizons with Rยฒ up to 12%. We use raw BAA-10Y (Moody's BAA corp minus 10Y Treasury) from FRED as the cheap proxy. Widening shock = risk-off pressure (short high-beta names with downtrend); sharp compression = risk-on regime (long beta names with uptrend).
financial conditions regimeMacroChicago Fed NFCI and adjusted ANFCI are weekly composites spanning ~105 measures of money / debt / equity / shadow-banking conditions. NFCI > 0 (tighter conditions) leads real activity by 2-4 quarters with elevated equity left-tail risk; ANFCI < -0.5 (notably loose) signals risk-on regimes.
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