When the Upside is Thin, Upgrade the Carry

GMO

Research

6 Pages

With investment grade spreads near historic tights, upside is limited and downside risk is rising. GMO explains why a shift toward high quality structured credit can improve carry, raise the spread break-even versus U.S. IG, and help limit mark-to-market downside when spreads widen.

Key Takeaways

Thin upside: Starting spreads below 85 bps historically led to spread widening 84% of the time over one year.
Better carry mix: GMO says structured credit can offer more carry than investment grade with materially less spread sensitivity.
Quality matters: Senior tranches and shorter duration bonds may hold up better when volatility exposes weak risk pricing.
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