During which part of the liquidity cycle is it best to overweight credit?

Overweighting credit during the bottom phase of the liquidity cycle is grounded in the relationship between economic conditions and credit spreads. At the bottom, when the economy is experiencing the peak of a downturn, investor sentiment is generally very pessimistic, leading to wider credit spreads and lower credit prices. This situation represents an opportunity because when the economy starts to recover, credit conditions tend to improve, and spreads narrow.

Investors who are equipped to navigate potential risks often find that higher yields on credit investments made at this stage can lead to substantial returns as the credit environment stabilizes and improves. As recovery begins, the perception of credit risk diminishes, resulting in capital appreciation and tighter spreads, which benefits those who entered the market when conditions were unfavorable.

Therefore, focusing on credit at the bottom of the liquidity cycle leverages the potential for substantial gains when the market normalizes and credit quality improves, making this phase the optimal point for an overweight position in credit markets.