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Barrow Hanley Credit Partners: Lens on Credit Series | Credit Markets: Then vs. Now

Credit Markets: Then vs. Now Fixed Income Portfolio Managers Chet Paipanandiker and Nick Losey provide their views on expected rates hikes by 2023 and how they will impact the financial health of high yield companies. More about Chet Paipanandiker, Portfolio Manager More about Nick Losey, Portfolio Manager

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Credit Markets: Then vs. Now

Fixed Income Portfolio Managers Chet Paipanandiker and Nick Losey provide their views on expected rates hikes by 2023 and how they will impact the financial health of high yield companies.

More about Chet Paipanandiker, Portfolio Manager

More about Nick Losey, Portfolio Manager

Video TranscriptExpand ↓

Yes the credit markets have been in a pretty interesting place over the last three years. We've basically been through a mini credit cycle. If you think back to what happened, go back to the early part of 2020, basically at a global pandemic. And by virtue of the Fed stepping in and helping to solve capital markets as well as work to develop a vaccine, we actually saw a credit markets do a complete about face. We started out with companies contemplating zero revenues and by the latter part of the year with the benefit of a vaccine, as well as with the benefit of companies terming out maturities and raising cash, basically enhancing their liquidity. You saw revenues come back and you saw companies with pretty pumped up liquidity facilities. So as a result, they were able to better handle the stresses that were occurring at the time, whether it's because of revenues, labor availability or inflation. At the same time, something else was happening to the consumer. You basically saw the consumer also see its balance sheet get pumped up by virtue of the stimulus checks that came through. And so pretty much you went through this period of extreme volatility where companies and consumers were in a bad place. They basically didn't about ship and everyone ended up in a generally better place from a fundamental perspective. And so what did that do with credit markets? We certainly saw a swoon to the downside when COVID occurred. Credit markets rebounded. As you went to the earlier part of this year, we ended into a period of new stress, basically Russia invading Ukraine. And it's interesting to see what happened to credit spreads during that time frame. So on a year to date basis, what you basically saw was double B's were underperforming because the Fed was raising rates. At the same time, credit risk was actually outperforming single B's and triple C's on a relative basis to double B's. But come April of 2022, they actually started to reverse, and you saw double B's start to outperform. And there was an indication that credit stress might actually be more of a concern on people's minds. And so you actually saw single B's and triple C's begin to underperform on a relative basis to double B's. What we are seeing in the credit markets today is, you know, something that we hadn't seen in a number of decades in the past. You know, when we think about what's going on in the environment right now, we came into the beginning of the year where inflation started to increase. And then with Russia, Russia invading Ukraine, basically that kind of added a spark to kind of really set the fire on inflation. And now we're sitting it roughly at 9% year over year inflation rate. We haven't really seen this type of inflation environment for upwards of four decades. So when you think about the investing world, there are not that many participants in the markets today that have actually directly experienced what we are experiencing now or are likely to experience if inflation stays at very high levels for the foreseeable future. Now, when we think about inflation, basically we were concerned about the inflationary environment going into the beginning of this year. So we really pulled back on our exposure to duration, longer duration assets and have benefited, because of that. Now we do not believe that we are going to run rate at a 9% inflation rate. You're already starting to see a lot of your data points tick over, but do not believe that we're going back to this one to 2% inflation rate environment.

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