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I have seen saying such as "invest in credit/be long credit", what does it actually mean? For example, I can buy high yield etf which is essentially a basket of low rated corporate bonds. When credit worsens, i.e the probability of default goes up the etf(following the bonds it holds) will go down and I will lose money. Am I long credit in this case?

If this is not the case, what are the ways to invest in credit. I assume this is where you take a view on the credit market(default probability)? So you either long or short credit instruments depending on that view?

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If you buy a credit-risky bond (corporates, munis, emerging markets... anything but the highest-rated sovereigns like Treasuries or Bunds, really), you're exposed to interest rates, as well as credit spreads. If rates go up, the value of your bond goes down. Similarly, if credit spreads widen, your position loses.

More generally, being long credit means you expect spreads to tighten, be it through holding bonds, bond ETFs, or selling credit protection via CDS (Credit Default Swaps)

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"Long credit" means that you are positively exposed to credit quality. This is commonly measured as the difference in yield between corporate bonds and government bonds. If credit gets better (the differences are smaller), you make money. If credit gets worse, you lose money.

If you invest in a corporate bond fund, for example, then you are "long credit" since increases in credit quality of the bonds in that fund will give you positive return (and vice-versa). You are also exposed to other factors like "interest rates" (typically meaning government rates) but you are still exposed to "credit" as a factor.

In your example, you are long credit - if "credit" deteriorates, the value of a high-yield corporate bond ETF goes down and you lose money. That's what "long" means - your returns are positively correlated to a factor.

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  • So effectively a derivative on interest rates?
    – keshlam
    Mar 13, 2023 at 17:52
  • No - it would be a derivative if there were a specific measurable security that defined "credit" that this would be based on. In this case there's not a specific security - just general market sentiment of the crediibility of companies in general.
    – D Stanley
    Mar 13, 2023 at 18:26
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    To be fair, there are "credit derivatives" like Credit Default Swaps, but those are based on other, specific instruments (like a bond or securitized product). I think the OP was talking about being "long credit" in a more general sense, though.
    – D Stanley
    Mar 13, 2023 at 18:45
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    Not a single-name CDS, but there are "short credit" ETFs that use CDSs to get short exposure, or that track CDS indexes (CDX).
    – D Stanley
    Mar 13, 2023 at 21:31
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    @user253751 there are also structured notes you can buy through your bank
    – 0xFEE1DEAD
    Mar 13, 2023 at 22:17

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