For example, for the past year we have continuously highlighted the asymmetry in risk/reward between equities and credit. As illustrated in Figures 2 and 3, credit and equities have correlated closely over the last few years and almost in a constant ratio. We don't see why that wouldn't work in reverse also.
In other words, to our minds there is an obvious long-equities-short-credit relative value trade insofar as credit has all the downside potential of equities, and much less of the upside." - source CITI
- "Relationship between credit volatility and spreads has broken down - Using CDX IG as an example, we find that after September 2012, the traditionally high volatility/spread correlation drops from 85% to 10%. In contrast, the correlation between CDX IG spreads and equity volatility has remained meaningful.
- Price volatility is a better risk indicator - In contrast to the spread volatility quoted in volatility markets, the equivalent price volatility exhibits better sensitivity and much stronger correlation to credit spread moves. We find that this relationship persists for recent (post September 2012) data.
- Credit spreads are currently tight relative to price volatility - A simple regression model using the past 1 year of spread/price volatility data indicates that index spreads are too low compared to both 1M and 3M price volatility levels." - source CITI