A worthwhile read IMO:
ChatGPT summary:
The memo discusses a potential "sea change" in the investment environment. It reflects on how the historically low-interest rates and accommodative monetary policy that characterized the period from 2009 to 2021 might be coming to an end. The author suggests that the current economic climate, marked by inflation concerns, rising interest rates, and changing market dynamics, may necessitate a shift in investment strategies. They highlight the following key points:
- The historically low-interest rates allowed for easy money and favorable conditions for asset owners, borrowers, and leveraged investment strategies.
- The recent rise in inflation has prompted central banks to change their accommodative stance and raise interest rates, signaling a shift in the investment landscape.
- The author argues that the investment environment might be fundamentally changing, and investors should not assume that the strategies that worked in the past will continue to yield the same results.
- The author suggests that credit instruments, such as high-yield bonds and loans, now offer competitive returns similar to historical equity returns with less uncertainty.
- Investors may need to consider reallocating their capital away from ownership and leverage and toward lending, particularly in the credit market.
- The memo emphasizes the importance of being prepared for surprises in the changing investment landscape and the need for a more cautious approach.
My opinion is that you should stay far away from HYB. Credit spreads are continuing to widen and junk bonds will widen at a much faster pace than IG. Given what I believe has yet to come and will start showing up in earnings in addition to refinancing risk - HYB market will have to turn away from DCM and Bonds and look at equity and alternative financing to support operations and their maturing debt tranches. At some point, the credit event pushes equities and bonds lower and treasuries higher as a flight to safety.
Banks are continuing to favor shorter-term loans between 1 and 5 years for refinancings or M&A - not new money. IG bond market continues to have excess demand with overbookings being a factor of 3+. I do not follow the HYB market but a credit event would start there first.