The following recap highlights his views.
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 yield curve).
• Bank loans have outperformed high yield bonds toward the end of expansions (rising rates/ flat yield curve).