If the risk, high yield, carry trade (call it what you will) was in genuine trouble wouldn’t one reasonably expect that the cost of insurance for default be on the rise? That is, Credit Default Swaps should already be trading at multi-week highs for high risk assets such as junk grade debt and emerging market debt? Yes that would be a logical conclusion especially when you take into account the level of “bearish” talk on the street. However, that is not the case. CDS spreads have hardly budged over the last few weeks and are trading below where they were in early December. Does this suggest that the smart money remains bullish? Does this mean that the market is merely trying to shake out the weak hands? We think so and consider the weakness in equities and commodities and commodity currencies as a buying opportunity.
