Currently we see some of the tightest spreads between “low risk” and “high risk” assets seen since, in many cases, close to 10 years.The tightening spreads between, for example, the 10-year US Treasury and stocks, 10-year versus high-yield, commercial real estate cap rates, and emerging market credit spreads, have been compressed to historically low figures. In the case of the US (and perhaps emerging markets generally), it’s ostensibly a product of new fiscal policies set to be rolled out, such as deregulation and corporate and personal income tax cuts.Yet the fact that emerging market credit spreads continue to tighten throws this into question. Dollar-positive events are generally negative for emerging markets, given they render emerging market debt more expensive. Moreover, when the US market becomes more attractive this generally makes emerging markets less attractive in relative terms, altering the flow of funds.Chart produced by Moody’s at various credit ratings:From the St. Louis Federal Reserve:Of course, part of the spread compression has something to do with the fact that emerging markets are more stable than they were even a decade ago (15+ years ago, emerging markets investing was like the wild west). Even so, a significant portion has to do with the fact that risk-taking appetite has simply accelerated since November, leaving elevated valuations in nearly all risk assets.Trade IdeaA simple way to bet on a reversal in this compression is to go long “risk-free” assets (e.g., 10-year Treasuries) and short “high-risk” assets, such as non-investment grade corporate bonds. In terms of US opportunities exclusively through ETFs, one could go long IEF (7-10 year Treasury fund) and short HYG (corporate high-yield).I’m personally not involved in these spread trades, as I’d prefer the spreads to get even tighter.