Trends Watch: Credit
November 04, 2021
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 Christopher Yanney, Co-Founder and Portfolio Manager, CKC Capital.
What is your outlook for credit investing?
Credit is near its all-time tightest in terms of both spread and absolute yield. This makes us very skeptical of longer duration instruments as well as companies with weaker credit profiles. We do not believe that the risk/reward profile of names with those characteristics are necessarily favorable at this point in time. However, we think much of the credit universe has improved their balance sheets via refinancing over the past three years given historically low rates. The market has also allowed many companies to gain access to capital that may not have had the chance to in other credit cycles. This has kept the default rate relatively low during a period where many in the market may have expected it to peak after the first quarter of 2020. We believe that if there is a significant move in rates that credit will be widely impacted and become very volatile. For the very short term however, we think that credit will remain stable given the large cash positions currently in the market as well as the improved fundamentals throughout the space.
Where do you see the greatest opportunities and why?
We continue to see the most value in the front end of the curve. Not only do we believe that relative value looks very attractive, but shorter duration bonds offer a significant amount of safety if rates were to move higher as they are not as rate-sensitive. We think the probability of a rate move is higher than normal in the medium term, especially if inflation is not transitory.
What are the greatest challenges you face and why?
Our biggest challenge is a very prolonged “zero rate” environment with subdued volatility. It can be challenging at times to find value in an environment where risk management, credit selection and trading aren’t at the forefront.
What keeps you up at night?
That inflation gets out of control. While our fund would potentially prosper in that environment, we worry about what effect that may have on the overall market.
The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.