Interesting graphs/credit/defaults

The below graph, from MS, is blurry and hard to read, but, it highlights that default rates are climbing (you’ve probably read commentary in the local market that insolvencies and bankruptcies are at highs not seen in years) and that recovery rates are low.

We’ve been saying for a while that credit spreads are quite tight, and that whilst headline (all in) yields look very good, at say 5%-6% depending on your level of risk, most of that is coming from the risk free rate (in the US, the cash rate is north of 5%, here is it is closer to mid 4’s, and longer dated bonds are between the 4.1%-4.4% range).

In other words, you might as well monetise the credit holdings and go long a mix of cash and treasuries, in the fixed income sleeve.

For the most part, that’s what we’ve done, taking profits on credit along the way, tickling up duration via AGB’s in the intermediate range, and letting cash build a touch at the margin.

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