Trends Watch: Fixed-Income
February 13, 2020
By Elana Margulies-Snyderman
EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.
This week, Elana talks with Skyler Weinand, Managing Member, Regan Capital.
What is your outlook for alternatives?
We’re bullish on safe, liquid, low-risk alternatives and cautious on the buildup of long duration, credit-sensitive, and leveraged assets. The global economy has had mostly smooth sailing, rising equity markets and low interest rates for over a decade now. Artificially and persistently low interest rates have caused distortions. For savers and investors (i.e., the suppliers of capital) low rates drop the “safe” or “risk-free” rates of return that investors earn on their fixed-income investments which leads them to migrate into riskier asset classes. For the investment managers and corporations (i.e., the users of capital), low rates incentivize them to borrow more. The combination of these two factors have led to the inflation of equity market valuations and riskier credit markets. It’s also led to massive inflows into private vehicles in both private equity and private credit. In order to maintain expected rates of return, these private vehicles have added incredible amounts of duration, leverage and credit risk. The end result is 1) elevated valuations and thus lower rates of return across corporate debt and equity, 2) significant leverage built up in private, illiquid vehicles. We are not forecasters and are not portending some great doom on the horizon, but investors are not being compensated for the risks they are taking and in some cases of which they aren’t fully aware. There are of course exceptions to this and there are still interesting niche opportunities available.
What is your outlook for the economy?
Our view is the economy is stable-to-improving. One of the indicators we actively watch for an indication of a healthy economy and market is the gap between 1 Month LIBOR and the 5 Year Treasury. Banks and much of the financial system rely on the ability to borrow short-term and invest long-term. We use LIBOR as a proxy for the rate to borrow and the 5 Year as a proxy of where institutions can invest. This spread has inverted eight times in the last 35 years, each time in response to a major event (i.e., the 1987 crash, Asian Financial Crisis, Dot Com Bubble and the 2008 Global Financial Crisis). It inverted over the summer. Why? This is the first time it’s really not clear why it’s inverted, but it was a bearish signal from the market. It has now reversed course and is heading back to healthy territory. We are cautiously optimistic not for robust economic growth, but at least for a stable economy and market. We still have a long way to go to get to healthy and robust growth.
What keeps you up at night?
Losing our partners’ money. We recognize how difficult it can be to have drawdowns and we make every effort protect our partners’ capital first.