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Nearing entry point, but volatility merits caution

Key points

  • November proved even harsher than October for risky assets, pushing credit returns deeper into negative territory.
  • The pain has been particularly acute for high yield, upending the reflation trade that saw high yield outperforming investment grade for much of 2018
  • An attractive entry point for credit must be close unless recession risk is around the corner.
  • Idiosyncratic risk has risen and is likely to rise further.

November sees valuations revert to neutral

November proved harsher for risky assets than October and credit reacted accordingly amid the market correction. The contrast to earlier in the year is that spreads not only widened more in November than in any other month this year but they also widened to a comparable degree across regions (12-16% in relative terms). This suggests that presence of heightened global risk aversion rather than more specific market drivers, like the underperformance of euro credit in the second quarter because of Italy.

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