I’ve talked a ton about the credit cycle and, more specifically, about why there’s likely nothing left for you in IG and HY in terms of spread compression.
At this point, on the heels of the truly spectacular rally off last February’s lows, you’re just being greedy in credit.
As I noted earlier on Tuesday, the fundamentals (particularly leverage) are bad, the rally for both investment grade and high yield off last February’s lows has been nothing short of monumental and, perhaps most importantly, there’s a very real risk that the proliferation of corporate credit ETFs has rendered the underlying market for corporate debt completely illiquid.
In the simplest possible terms, there’s a notable asymmetry here. It’s high risk, low reward.
Still, there are a few reasons to believe the cycle hasn’t turned just yet. Personally, I don’t think that’s an investable thesis (i.e. trying to squeeze a few more basis points out of spreads that are already tight on the assumption that things aren’t going to hell in a handbasket tomorrow).
With all of that in mind, consider the following graphic from Morgan Stanley whose analysts explain why we aren’t quite there yet when it comes to the end of cycle dynamic.