Alternative Credit Letter

Investors have somehow learnt to deal with low or negative nominal yields. But now, as real yields fell to record low levels such as -6.8% in the example for short-term real rates, bond investors need to wake up as this results in severe damage for their personal wealth. Of course, inflation rates are expected to […]

The hawkish tone of Powell’s remarks on November 30 surprised the market and the yield curve flattened significantly as a consequence. While long term rates retreated considerably, the Fed funds futures imply a sooner Fed funds rate hike now, as it is illustrated in the chart. In September, the market did not price in a

Since the beginning of 2021, breakeven inflation has risen sharply, and has reached almost 3% at the end of October, leading to a breakout in short term nominal yields and a bear flattening of the yield curve. Now, markets price in two rate hikes in H2 2022. Over the past decade, breakeven inflation has been

Leveraged loans held steady during the risk-off mode in the 2nd half of September. While US high yield bonds were negatively affected by higher trending interest rates and falling equity markets, leveraged loans benefitted from their floating rate feature. In addition, the robust performance of leveraged loans was also driven by strong demand from institutional

While high quality bonds with close to zero yields haven’t offered a feasible investment opportunity since a long time, equities rallied over the last 18 months. However, equities trade now at elevated levels in a historical context and annualized return expectations over the next 10 years are only in the low to mid single digits,

The Treasury yields fell substantially in July, especially at the long end of the curve. Moreover, current Fed fund future prices point to a more moderate pace of rate hikes, as the chart illustrates. It remains to be seen whether recent price movements represent an overreaction, especially in the event that labor supply constraints will

CLOs have always offered an attractive premium to bond or loan spreads, but investors continue to overlook the asset class due to their complexity and as they tend to be less liquid during market stress periods. However, a rational investor should take advantage of this relative yield advantage. Now, the yield spread looks particularly interesting

The steepening of the US Treasury bond yield curve increased the volatility of interest rates overall. This is well illustrated by the MOVE index, an indicator that measures interest rate volatility using the implied volatility of a basket of government bond options. However, the MOVE index is far from its late February peak and is

In 2020, the rating agencies acted as quickly as never before in downgrading the issuer ratings due to the COVID-19 pandemic – very different to 2007/08, when rating agencies were criticized for acting too slowly. During 2020, 45% (USD 521 bn) of the loan market by par amount had received a rating downgrade from a

In anticipation of a strong economic recovery ahead of us, long term interest rates have spiked from their historical lowest levels This has paid its toll For example, US investment grade bonds suffered a performance of ~4.5% on a YTD basis as these bonds are highly interest rate sensitive with an average duration risk of