My 2005 Prediction: Credit as an Asset Class

With all the New Year’s predictions flying around the Internet and print media, it seemed prudent to join the crowd. But instead of trying to discern which stock will be the next Google, I thought the better path for my modest prophetic abilities was to jump on the credit bandwagon.

Specifically, I believe that credit will become a tradeable and distinct asset class in 2005.

Among hedge funds and loan portfolio managers, credit trading is well established. The development of credit default swaps (CDSs), allows market participants to hedge away the risk of default of a given corporate credit, or for speculators to bet that a given company’s credit condition will improve. This can also be done at the index level, as two products–TRAC-X, developed by JP Morgan and Morgan Stanley, and iBoxx, created by Deutsche Bank and Citigroup–offers buy-side investors broad market exposure to credit with significant liquidity.