Dedicated to Fixed Income Investing

Another Strong Quarter as Economy Re-opens

Solid economic growth has significantly reduced default risk and should allow leveraged loan and high yield issuers to de-lever and grow into their balance sheets.

Peak Growth, Peak Inflation, Rates Rally

As a result of a modestly “less dovish” stance by the Federal Reserve (Fed), long Treasuries were up almost 6.5% in the second quarter after being down 13.5% in the first quarter. Long TIPS (Treasury Inflation-Protected Securities) were up over 8% compared to an 8.8% decline in the first quarter, as they benefited from the upside surprises seen in the consumer price index over the quarter.

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%.