Alternative Credit Letter

The performance of local emerging market debt portfolios has historically been relatively closely negatively correlated with changes in the US 10-year treasury yield. For example, the drop in US 10-year yield during 2020 COVID pandemic preceded rally in local EM debt. Subsequently, rise in US inflation and interest rates in 2022 triggered a selloff across

Following the rally on credit markets during Q4 2023, more than a third of US High Yield keeps trading at credit spreads below 200bps over risk-free rates. On a risk-adjusted basis, such spreads remain tight from a historical perspective, especially when a challenging macroeconomic outlook is considered. While overall a yield of 8% on US

Current market yields continue providing an attractive entry point across sectors in context with their historic downside risk, calculated as standard deviation of negative monthly returns over the last 10 years. This includes particularly adverse events, such as March 2020 market selloff (COVID pandemic start) and broad market repricing during one of the steepest rate

Historically, the income and total returns on European broadly syndicated loans have been comfortably exceeding realized default losses. This trend is evident from the chart with incomes, comprising of interest and fees, exceeding 4% and realized losses well below 1%. Total returns with mark-to-market component have also remained strong with the exception of 2022 market

The yield breakevens, calculated as yield divided by duration, indicate by how much can yields rise, or credit spreads widen, before incurring capital loss equal to annual yield accrued on investors’ holding. A ratio of 1.0 implies that 1%point increase in yield or spread eliminates the entire year’s worth of yield accrual. As evidenced on

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