GMO argues that historically tight investment-grade credit spreads leave investors exposed to asymmetric downside risk, making a shift toward higher-quality carry strategies increasingly attractive.
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With spreads below 85 basis points, historical analysis suggests a high probability of spread widening over the next year, limiting potential upside.
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Structured credit strategies with shorter spread duration can offer higher carry while reducing mark-to-market sensitivity during volatility.
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Prioritizing senior positions in the capital structure and avoiding negatively convex securities can improve risk-adjusted returns through credit cycles.
When valuations leave little margin for error, the key question becomes clear: are investors being adequately compensated for the credit risk they are taking?
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