Market Notes
Credit Spreads Are Too Tight
Investment-grade and high-yield spreads are near post-GFC tights. History suggests this level of complacency is rarely rewarded.
Note
IG spreads at 85bps and HY at 310bps. These levels imply default rates well below historical averages and leave no room for even a mild economic slowdown. The risk/reward in credit is asymmetric to the downside.
Worth noting: CCC-rated issuance has surged 40% YoY, a classic late-cycle signal. Covenant quality continues to deteriorate. The market is pricing perfection in an environment that is anything but.
We are underweight credit in favor of duration. If vol picks up, the spread widening will be violent.