Alternative Credit Letter

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

Since December 2020 US long term nominal yields (US Treasury 10y) rose 60 bps, while expected inflation (US Inflation Swap 5y5y) remained flat at ~2.2% Markets incorporate a benign outlook, but inflation will pick up significantly over the next quarters based on statistical effects (y-o-y comparison) and cyclical forces (economic recovery, lower unemployment, higher commodity prices) Therefore,

Since September 2020, the FED’s policy allows for a period of inflation over their 2% target: “[…]the Committee will aim to achieve inflation moderately above 2 percent for some time[…]”, which is indicating that they are more concerned about the prospect of too little inflation, rather than too much. So, what temporary inflation level will

With the arrival of the pandemic crisis, the FED had cut rates aggressively close to zero. In addition, it had announced an adaption of its interest rate policy towards an “average inflation targeting” and that it will keep short term rates low for a multi-year period. Since late 2020, the long end of the USD OIS swap curve

During the market rally in November, credit spreads have further tightened and reached almost pre-Covid levels in the investment-grade category, whereas spread levels are still wider in the high-yield market. OAS of broad US investment-grade corporate bonds are now only slightly higher (112 bps) in comparison to the start of 2020 (99 bps).  US high-yield

Year-to-date US high yield corporate rating downgrades accumulated to more than 475 – even surpassing the previous crisis in 2008. The up-/downgrade ratio (proportion of upgrades among total rating actions of Moody’s and S&P) marked a low of 0.16 in Q2 2020 and the accumulated YTD ratio reached 0.25, a similar low level as experienced