All of a Sudden

December 2021

The past six weeks should act as a reminder that market sentiment can turn quickly. For most of the year, the credit markets remained in a relatively narrow trading range. Since mid-November, risk premiums rose approximately 20 basis points, matching the March highs. What began as market indigestion following a heavy new issuance calendar, morphed into a volatile week following the Omicron variant outbreak concerns. Here are a few observations:

Buyers at a Price

Throughout this period, buyers emerged, albeit, demanding price concessions, whether to meet the heavy new issue supply or following the dissemination of new information on the Covid-19 variant.

Market Liquidity

Market activity was subdued but orderly during the most of the past six weeks. We would note the absence of forced selling.

Valuations

Rising from expensive levels, risk premiums remained within their 2021 range. To be clear, valuation changes appeared to be driven by the uncertainty related to a potential change in the fundamental macro backdrop.

Corporate Fundamentals

Corporations continue to focus on balance sheet repair or are avoiding the leveraging activities normally seen in an expansionary market phase. Aggressive M&A, dividend increases and share buybacks have not yet materially altered the fundamental trajectory of the Investment Grade universe. Ultimately, we believe that this positive backdrop, provided material support to credit markets.

Fund Positioning

Despite the riskier macro backdrop, we still maintain a positive view of the credit markets over the medium term. Since the initiation of the pandemic, corporations have largely strengthened their operating positions. Our investments remain concentrated in companies with longer term growth trajectories, stable balance sheets and a real prospect for rating upgrades over time.

Over the past six weeks we were actively adding credit risk to the portfolios. We participated in the new issue market focusing on the securities where price concessions were material. We also added credit exposure through the secondary market, either outright or by selling shorter term securities where the annualized gain was deemed adequate.

We would like to take this opportunity to thank everyone for their continued support. Wishing you all a happy holiday and a safe and prosperous new year.