Shelter In Credit

Along with risk assets across the board, the high yield market is currently undergoing a dislocation the magnitude of which occurs only once every decade. Uniquely for high yield credit, returns can be scenario-tested based on discrete cash flows because either coupons and principal are paid or bonds default and creditors recover on the claims. GMO has developed a stress test for the high yield market that demonstrates that while the bottom may not yet be in sight, the sell-off is being overdone given the high yield market can deliver positive real returns through a cycle even under draconian default and loss assumptions.