High yield falls out of favour

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We changed our recommended weighting on high yield to underweight in mid-March, effectively ending our down-in-quality theme for the time being. While we continue to believe that default rates will remain stable at current levels, adjusting for the inclusion of the autos, high-yield spreads stand only 20 basis points wide of March 2005 levels. Moreover, as shown in chart 1, our long-term model of high-yield spreads has only shown two negative residuals since 2002: February 2005 and currently

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