Bloomberg reports that Morgan Stanley analysts included among their top 13 trades for 2013 a bet that the cost of credit derivatives protecting against losses on junk bonds will get more expensive relative to investment-grade debt as sluggish growth fuels more corporate defaults. After the difference between the measures plunged to a 14-month low in September, Bank of America credit trader Kavi Gupta wrote in an e-mail to clients last month that the so- called decompression trade was his favorite strategy.
The wager was among those amassed by Bruno Iksil, the London-based trader whose positions were at the heart of the biggest U.S. bank’s losses. While a loser for Iksil, fired after what JPMorgan Chief Executive Officer Jamie Dimon called 'flawed' and 'poorly executed' positions, the strategy is now in fashion after Federal Reserve efforts to hold down interest rates and push investors into riskier assets drove junk-bond yields to a record-low 6.84% in October.
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