HY spreads are very tight but because investors haven’t properly adjusted their mindset to a non-zero interest rate world and are only focused on absolute yield. So the credit market(s, both public and private) trades on yield because at a ~7% in HY you’re being well paid for default risk, right? /1
Comments
https://www.euromoney.com/article/b1dmq7stkddq9b/ual-inside-the-fiasco-of-the-decade
...if the market were rational.
High yield is just a game of financial chicken. It’s only suitable for investors who have run out of other ways to lose money.
You’re never paid enough for default risk when the borrower actually defaults.
On DR, if you incorporate distressed exchanges (I think most do now) defaults are already running at a decent clip… this should be incorporated in FV OAS models, no?