“We’re in a golden age for income producing alternatives” – Stan Sokolowski
CIFC Asset Management’s Natalia Lojevsky and Stan Sokolowski provide their insights into the Fixed Income Markets, which have been experiencing an elevated bout of volatility as interest rates and inflation expectations have risen sharply. Stan and Natalia discuss the sea of red YTD for traditional fixed income returns and say we’re in a golden age for income producing alternatives.
Traditional Fixed Income YTD Returns:
Providing their solutions for finding yield when it’s scarce, CIFC recommends senior secured corporate loans in portfolio allocations. A product they see fit in every rate environment.
Discussion Highlights Include:
The Macro Environment
- Growing optimism surrounding the economic recovery, further stimulus, and the sunset on the pandemic have not automatically translated into decent returns for rate markets in many higher growth assets. Volatility attacks have surprised investors a few times already as the VIX surged upwards in each month this quarter.
- Growing anxiety over numerous sizeable stimulus packages that some fear could overheat an improving economy.
- The current macro investing environment favors spread based low-duration income generating assets such as loans.
Rates & Inflation
This year interest rates and inflation expectations have moved quickly higher. US 10-year yields have increased almost 70%. This is the worst start to a year since 2009! As rates have increased, prices have adjusted downward. Stirring inflation has pushed many commodity prices considerably higher. A recent WSJ article, notes a wave of new treasury issuance will put further pressure on traditional fixed income assets like investment grade bonds, MBS, and municipal bonds.
What Does this Mean for Performance of Traditional Fixed Income?
How senior secured corporate loans fit into the whole picture: In today’s ultra-low-yielding world, we view floating rate loans as a fixed rate product with a call option on rates. If rates decline once again, you’re still generating better income than the alternatives available today. A decline in rates could signal certain risks in the economy and a senior secured position provided by loans will help cushion investors from a turbulent macro environment. Senior secured loans are an indispensable position in investor portfolios to growing concerns on income, rates, yield and inflation.
The tug of war between policy, growth, inflation and interest rates persists. Expect volatility to stay elevated. The macro & economic conditions are supportive of credit, which CIFC says provides excellent return potential for investors today. Yield is scarce in a world of elevated valuations and we’re in a golden age for income producing alternatives. Our recommendation: a senior, secured position provided by loans will help cushion investor portfolios from certain risks while continuing to generate income.
CIFC Asset Management specializes in global credit solutions. The firm was founded in 2005 and today manages over $30 billion in AUM across CLO’s, Corporate, Structured and Opportunistic Credit while working with institutional and retail investors worldwide.