Morgan Stanley recommends short-dated IG tranches

In its latest "credit derivatives insights" report, Morgan Stanley analysts say that despite their generally bearish outlook on credit, there are several attractive long credit opportunities in the investment grade and leveraged finance markets. The report recommends short duration trades, including six month second-to-default baskets and three-year senior investment grade tranches, since wide spreads and flat-to-inverted curves mean investors do not need duration to get yield.

It says that short-dated senior tranches may generate yields that hit many investors' return targets, but with lower duration. The researchers argue that the confluence of flat curves, low near-term default risk and elevated levels of correlation make a strong valuation argument for short-dated tranches.