Credit’s Odyssey: Steering Toward Ithaca

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At any other time, the events that took place in Credit markets during the fourth quarter of 2022 would have seemed extraordinary. Given the year gone by though, the Federal Reserve's back-to-back rate hikes and a pension crisis in the UK simply perpetuated a deep freeze in the Credit markets that stretched back to the onset of high inflation and rising rates. As 2023 got underway, a risk rally and signs of green shoots in parts of the Credit markets soon gave way to another volatility shock, this time in the form of an increasingly apparent asset-liability mismatch in the banking sector. It has never been clearer that the Hunt for Yield is now a Hunt for Capital.

Amid tighter financial conditions, it is a very good time to be a lender with ready capital. We believe Credit offers a better risk/return proposition than Equities in the near term due to the combination of higher yields, debt’s position in the capital structure, the contractual nature of returns in Credit, and the pressure equity valuations are under as long as rates remain elevated.

Ultimately, we believe that capital markets will reopen, and we will explore some of the potential catalysts for that. In this letter, we consider what the Hunt for Capital means for investors in more detail, the case for Credit over Equities, and why a jogging pace strikes the right balance between the risk of moving too slowly in a market on the brink of change and the risk of diving too aggressively into risk in a volatile environment.