11 Apr Market Series – ‘Sidestepping the Relative Value Trap in Credit’
Voya Perspectives – Market Series
For the typical credit investor, the general rule of thumb when considering the relative value of a bond is that “wide” equals “cheap”. This premise suggests that investors should buy the issues trading wider than the overall market and allow the spread carry and the potential mean reversion of spreads to drive portfolio outperformance. While this application of relative value is relatively useful in a generic and fairly static mid-cycle environment, this simplistic approach breaks down in a changing world — such as when cyclical or secular forces are reshaping an industry or when a credit cycle is turning.
In this note we examine this potential relative value trap and offer some portfolio positioning considerations in light of the current investment environment.