Investors should buy credit protection, warns Morgan Stanley credit strategist

Investors should use the range of credit derivatives products to hedge their exposure to European corporate bonds, Morgan Stanley fixed-income analysts said today, adding they are bearish on the prospects for European credit next year.

Neil McLeish, credit analyst at the US bank, said current levels of debt were unsustainable. He also argued that credit prices reflected high market expectations, and that there is “virtually no risk premium” providing an incentive for continued activity in the market for investment-grade debt.

The price of high-yield debt was more indicative of real value, argued McLeish. He also said that credit had excelled in 2003 due to corporate deleveraging, which could not continue indefinitely.