Credit spreads

The recent run of “better than expected” macro data has seen default risks decline (jobs up, inflation down, GDP growth revised higher) and as such credit spreads have narrowed.

The graph below shows a bunch of total yields, and, the spreads, let your eyes in particular drop to the US BBB spread (third row, third column) and the HY x energy option-adjusted spread in the bottom right.

That’s either record or near record lows.

There is just no way we’ve be buyers of high yield, just now. Might as well either buy the equity (drop down the capital stack but get the option value of the upside) or move up the stack and get into investment grade (which is still too tight, really) or, just bite the bullet and buy the government bonds without the credit risk, since the carry is still good enough.

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