Dedicated to Fixed Income Investing

As rates and inflationary expectations rose, investors in search of higher yields returned to the leveraged loan market in the first quarter. That allowed us to explore a number of new relative value opportunities. We also held on to the names we felt had the liquidity to ride through the pandemic lockdown, and we’re starting to see that benefit now.

In the high yield market, the three key dynamics were the COVID-19 vaccine rollout, the Treasury sell-off, and a record increase in supply. The ICE BofA US High Yield Index had a 0.81% return. The Index ended the quarter with a yield of 4.36%. The BB index ended with a yield of 2.58%. The single-B index ended at 3.92%, and CCCs tightened to 6.3%.

Steeper Curve, Record Liquidity, and Robust Growth Prospects

With rates rising every month of the first quarter and negative total returns across the board, one might assume that would lead to massive outflows in the investment grade taxable category. On the contrary, it was the exact opposite. An unquenchable thirst for yield led to consistent inflows.

Resilience Abounds

For 4Q, the JP Morgan Leveraged Loan Index returned +3.78%, bringing the 2020 return to +3.19%, but loans drew more attention in early January as rates rose. The ICE BofA US High Yield Index had a 6.48% return. The confluence of election results and COVID vaccine announcements set the stage for a powerful rally, led by companies with strong business models and a significant liquidity runway to deal with the pandemic.

Will Fiscal and Monetary Policies Make America Reflate Again?

For all the uncertainty about the pandemic, elections, and fiscal support from Washington, the fourth quarter of 2020 saw a liquidity driven rally led by the lowest quality, highest beta parts of the investment grade taxable market. According to Deutsche Bank, 38 of the 39 asset classes it follows were up in the quarter, very much like 4Q19.