Alternative Credit Letter

The Bloomberg Global Agg. Bond index, which is composed of corporate and government bonds, experienced with a decline of -11.6% year-to-date by far the worst performance on record! The losing run came only to a halt in mid-May with a loss of -12.4% and recovered only slightly since then. The chart in the monthly spotlight

Yields of US short term low grade bonds broke through the 10-years average of 5.7% and reached a level of 6.9%. Since the Fed signalled a faster pace of interest rate increases in the coming months, investors divested longer term bonds in favour of their shorter term counterparts. The yield curve steepening by more than

In macro-finance, it is well known that an inverted yield curve is signaling a recession or at the very minimum, it is indicating that the economy is operating in a late cycle. For example, the 2-year/10-year Treasury slope has inverted in advance of 7 of the past 8 recession periods. However, it is a less

Within a matter of only two weeks, European High Yield spreads have jumped to a spread level of 480 bps, well above the last 5 years average of 366 bps and back at August 2020 levels. As chart 8 on page 2 demonstrates, sectors such as “food & beverages” or “chemicals” performed the worst given

Looking back at the last rate hike cycle (2015-2018), credit spreads for both high yield and investment grade bonds were not immediately negatively affected when the Fed rates started to take off. However, the more mature the economic cycle became, the stronger the negative effect was, as reflected in the widening of spreads in 2018

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,