Top 10 Takeaways
- During Q1, small caps, fallen angels and low-rated credits outperformed their counterparts.
- Our proclivity for small cap credits and fallen angels contributed to our strategy’s outperformance, in addition to general credit selection.
- The high yield market tightened, ending the quarter with a spread of approximately 475 basis points over treasuries.
- While low in absolute terms, we believe spreads remain reasonable given the benign default rate hovering around 1%.
- Corporate balance sheets remain strong
- From a Corporate Treasurer’s perspective the current environment is an excellent time to issue debt; from an investor’s perspective this warrants caution.
- Consequently, the high yield and bank loan new issue markets maintained their torrid pace during Q1.
- High yield bonds and bank loans are both high yielding credit instruments, but have nuances that produce different behaviors in different stages of the business cycle.*
- High yield bonds have outperformed bank loans at the end of recessions (steady rates/ steep yield curve) and at the beginning of expansions (falling rates/flat yi eld curve).
- Bank loans have outperformed high yield bonds toward the end of expansions (rising rates/ flat yield curve).
*High Yield bonds = Credit Suisse High Yield Index; Bank Loans = Credit Suisse Leveraged Loan Index.
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