Wall Street Eyes Credit Risk: Barclays Bets on Default Protection

Barclays strategists have recently recommended a strategy of buying credit default swap protection on the US high-yield index. To finance this, they suggest selling less risky protection, a tactic known as a payer swap. This move aligns with similar suggestions made by Morgan Stanley recently, indicating a growing sentiment towards hedging against credit risk.

The market is showing increased activity in derivatives for credit protection. The cost to insure against defaults on US high-grade corporate bonds has risen, even as the spreads on the actual bonds have tightened. This divergence suggests that market participants are more actively seeking protection through derivatives rather than selling off company bonds, which would imply a higher perceived risk of corporate defaults.