Every cycle has its canaries in the coal mine – those events that serve to wake up investors to long-ignored risks. There are significant risks in the IG bond market that have been overlooked and mispriced for years and the downgrade of GE could be an early warning to corporate credit investors of the potential for a more widespread repricing in lower-rated IG and HY bonds.
We believe the lower-rated IG market is likely to meaningfully reprice and will eventually provide a compelling opportunity for attractive long positions after it reprices lower. Until that occurs, we continue to use this area of the market as a fertile source of inexpensive single-name short opportunities.
Tom McCauley and Yoav Sharon are portfolio managers at Driehaus Capital Management.