Long/short opportunities in high yield

During bear markets, investors value credits on the basis of default risk. This leads to a wider dispersion of yields, benefitting investors who can go long/short, argues Curt Schade

The sell-off in the high yield credit markets is attracting the attention of investors but many remain on the sidelines as they struggle with the challenge of timing the correct entry point. This overwhelming urge to 'market-time' credit is a reflection of the reality that most credit managers are long-biased and that the penalty for being early can be severe.

Figure 1 displays the historical average price for the Credit Suisse High Yield Index and demonstrates the cyclicality of the high yield