Alternative Credit Letter

Following further slowdown in inflation expectations, real rates have surged in the last three months and are now exceeding 2%. The positive long- and short-term real rates benefit fixed income investors across entire spectrum of credit market sectors. Due to relatively tight investment grade credit spreads, real yields of 3.5% on IG corporates only slightly […]

While increasing risk free rates have been the key drivers of rising yields and returns of syndicated loans during the last twelve months, the credit spreads, represented as discount margins over floating benchmark rate, have exhibited significant volatility during the same period. Single B-rated loans have been widening disproportionately, with increasing risk premia sensitivity evident

Yields on first lien private loans have reached their highest levels since 2008 during the Great Financial Crisis and remain attractive relative to broader private loan market as well. For illustration, first lien yields on one of Alpinum’s representative portfolio in USD are now exceeding 11% p.a. (or ~7.5% hedged in CHF). Rising risk free

Following interest rate hikes and considering growing evidence that inflation expectations had peaked, the short-term real rates have been recovering from their record lows. At the same time, the 5-year breakeven inflation data suggest stabilization towards 2% range. The recovery of real rates is benefiting fixed income investors. When considering the longer term 5-year breakeven

Since the start of the FED’s tightening, credit spreads on residential mortgage-backed securities (MBS) have been widening significantly. For example, the credit spreads on junior B1 and B2 tranches of Credit Risk Transfer notes (CRT) have doubled since their 2017 lows. These junior CRT tranches absorb initial losses on diversified US agency residential mortgage-backed pools

Yields on leveraged loans are currently reaching 10% and remain materially higher than yields on equities. Since 2022 the loan investors have been benefiting from rising rates, which translated into increasing income via quarterly benchmark rate resets. With any new loan refinancings, investors are now also benefiting from increased credit spreads, as lenders incorporate higher

Credit yields are now significantly higher than earnings yields on equities. HY bonds are currently yielding 8.5% and loans 10.4%. Meanwhile, earnings yield on equities ranges from 5.1% current to 7.5% when adjusted for the long term inflation expectations published by the FED. Most of the increase in credit yields is attributable to rising rates.

One of the fastest rate increase paths in modern history has led to a true paradigm shift in US Treasury rates. Compared to one year ago, the rate levels are now higher and have negative term premia causing inversion anywhere beyond the 6-months tenor. Such inversion indicates recession risk, which remains a topic of debate

Central banks moved away from easy money policies and changed course. Not only the interest rate hikes but also the liquidity withdrawals have affected the markets and will continue to do so. After years of quantitative easing with ballooning balance sheets, the regime shift means that central banks will no longer backstop markets – unless

Slowing global economy, combined with tightening financing conditions and input costs inflation will lead to higher expected credit default rates in 2023 and beyond. In our observations, market participants expect that defaults would peak at around 6 to 6.5% in 2023 for high yield bonds and just below 5% for leveraged loans. As the chart