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Not only the equity market indices are at all time highs, but US corporate high yield spreads, as can be seen in the chart below, trade at the lowest they’ve been for the last 3 years. There is a high level of complacency, and confidence that the Fed can engineer a soft landing. The main attractive form high yield bonds is that they can offer, through high coupons and high yields, a buffer against interest rate risk, and compensation for a riskier balance sheet. Now we have the risks, and little protection. It is true that the next most likely move in rates will be to the downside, and lower yields extend duration, but the compensation for a riskier bet is barely there. Economist assign a 40% probability of a recession in the U.S., but assets are trading as if the probability was close to zero.

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