May 26, 2020 Weekly Credit Insights ▸ View PDF: Penn Capital's daily credit review focuses on core credit, interest rate, and yield curve indicators, seeking to assist investors in making disciplined and informed decisions.
Small value equities are valued -38% below their 10-year average, while growth, defensive, low volatility, and ESG factors exceed the bubble threshold of +30%. This dispersion has reached a 20-year high, in line with the dot-com bubble.
April 30th will see record fallen angel bonds move out of investment grade indices, more than the entirety of 2009. In response, the Fed has expanded its credit facilities to purchase fallen angels and HY ETFs.
Credit spreads peaked at 10.87% so far in the COVID-19 crisis. Spreads above 10% have occurred in 16 months over the last 25 years. In those 16 periods, high yield bonds have outperformed other asset classes, even stocks, over the 3 years that followed.
High yield bond spreads are 10.71% vs treasuries as of 3/25/20, elevated above the historical median of 4.89% due to macroeconomic uncertainty.
Short duration BB-B bonds continue to exhibit top ranked risk-return. To illustrate the extent of this anomaly, we’ve compared the ICE BofA BB-B 1-3Y index to every market index within the Morningstar Direct database.
A loan fund’s size and investment opportunities are negatively correlated. This makes capacity constraint a key factor, allowing for high conviction focus on quality opportunities.
Short duration bonds have a Trojan horse. Long maturity bonds often masquerade as short duration. With a minor price change, a short duration bond with a long maturity can become long duration, revealing far more risk than originally indicated.
Equity has a credit blind spot. 95% of Russell 3000 companies issue debt, 75% of which is sub-investment grade. Equity investors study stock price movements but often ignore credit market signals.
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