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Here's the thing about going bearish in credit based purely on valuation. You need some trigger. People aren't going to wake up on Weds, look back at prices they paid on Tues, and say "what were we thinking?" 1/
A BB-rated bond that trades at +170bps today isn't going to sell off just because that's a stupid spread. Even if the last buyer who paid +170 overpaid, ostensibly there are buyers at +175 or +180. You can't get a lasting sell-off from just "that's too expensive." 2/
Since credit is ultimately a carry game, you only get sell-offs when mkt sees losses coming. Until actual credit impairments are a proximate risk, spreads generally keep tightening. 3/
Right now many buyers are playing for compression to continue. That's what is driving these weak credit deals to be wildly oversubscribed. The momentum is behind B/BB or CCC/B compression. If it does continue, there is still good return to be had. 4/
Of course, you are playing the classic nickels in front of the steamroller. I'm currently positioned quite cautiously myself. But I'm also realistic. In order for credit to meaningfully sell-off, something has to happen, and currently I don't know what that might be. (fin)
