The Credit Sell Off and Where We Are Now (w/ Dan Rasmussen & Greg Obenshain)

TL;DR

High yield bond market experiences rapid sell-off with historical recession-like levels, offering attractive opportunity for investors.

Transcript

DAN RASMUSSEN: So, fundamental analysts, I think-- and, Greg, you began your career as a fundamental analyst-- often think of the way to approach high yield as going to find a high yielding security and then underwrite it to make sure that it'll actually return that yield. But what you're arguing is that the base rates of return are actually better... Read More

Key Insights

• ✋ The high yield bond market has experienced a rapid sell-off comparable to historical recession periods.
• ✋ Well-known companies in the high yield market are offering attractive yields, despite the uncertain economic environment.
• ✋ The current sell-off presents an opportunity for investors to earn high returns, especially for pension funds seeking higher yields.
• 💐 Lower yielding bonds are more susceptible to unexpected events and may not deliver the expected returns.
• ☠️ BBB rated bonds have performed well in the current downturn relative to lower-rated credit, with downgrades and defaults being a gradual process.
• ✋ High yield bonds offer a margin of safety with higher yields, compensating investors for potential losses.
• ✋ Historical data suggests that high yield bonds tend to rebound more quickly than equities after a crisis, offering potential positive returns within months to a year.

Questions & Answers

Q: How has the high yield bond market been affected by the pandemic?

The pandemic has triggered a rapid sell-off in the high yield bond market, with yields increasing and spreads widening. Investors are now able to lock in higher returns on well-known companies.

Q: Are lower yielding bonds a better investment option?

Lower yielding bonds tend to be more prone to surprises and unexpected events, leading to lower returns. Higher yielding bonds, despite the risks, offer better base rates of return, as they have the potential to be upgraded and earn their yields.

Q: What opportunities does the current market present for pension funds?

Pension funds, in search of higher returns, have the opportunity to invest in high quality, high yield bonds of well-known companies. These bonds are currently yielding 5%, 6%, or 7%, providing an attractive investment for pension funds.

Q: How have previous recessions affected different credit ratings?

In previous recessions, default rates increased, with CCC and lower-rated bonds experiencing higher cumulative default rates. BB rated bonds had lower default rates, and investment-grade BBB bonds also performed well and had a lower default rate than expected.

Summary & Key Takeaways

• The high yield bond market has experienced a rapid sell-off, with yields increasing from 5.5% to 9% in just over a month.

• This sell-off has brought the high yield spread to recession levels, similar to the periods after 9/11 and the Lehman crisis.

• Despite the uncertain economic landscape, there are opportunities for investors to earn high returns on well-known companies, such as Levi Strauss, NRG Energy, Netflix, Charter Communications, and Match Group.