When is it advisable to underweight credit concerning new issuances?

Underweighting credit when it is low typically indicates a strategic investment decision influenced by relative value assessments. When credit conditions are tight or spreads are narrow, credit instruments may be perceived as overpriced relative to their risk profiles. This scenario often leads to lower potential returns as investors are not being adequately compensated for the credit risk they are taking on.

In environments where credit is low, issuers might be able to issue debt at lower yields, potentially making existing credit instruments less attractive. As a result, weighing less on credit can help avoid exposure to overpriced assets and position the portfolio more favorably to capture better opportunities when spreads widen again or when market conditions change.

In contrast, high credit conditions might present opportunities to invest, and increasing interest rates can make high-quality bonds more attractive than credit risk. Additionally, high liquidity typically provides a favorable environment for investing in credit, rather than underweighting it. Therefore, the strategy of underweighting credit aligns best with contexts where credit spreads are low, implying less attractive risk-reward scenarios.