This week’s chart shows just how quickly sentiment can shift and why active management may help uncover opportunities.
January 25, 2019 | 1 minute read
Global equity and fixed income markets experienced significant volatility in Q4 2018 as a broad-based “risk-off” sentiment quickly escalated. In December, senior secured loan and high yield bond prices reached their lowest point in approximately 2.5 years driven by large investor outflows.1
Bank loan mutual funds recorded their largest ever weekly outflow in the last week of December and their first quarterly outflow in a year.2 Meanwhile, investors withdrew $6.8 billion from high yield bond mutual funds in December, capping the asset class’s largest ever annual outflow.2
The sell-off came at a time when corporate default rates remain near historic lows. High yield and senior secured loan defaults ended December at 1.8% and 1.6%, respectively.3
As the chart shows, senior secured loan and high yield bond prices have since moved well off their late-December lows.
The sharp sell-off in the fourth quarter and January rally serve as a timely reminder of how quickly sentiment can shift. In these environments, technicals (supply/demand) tend to drive prices rather than fundamentals. These periods may create opportunities for managers with the expertise and liquidity to take advantage of investments arising from the volatility.
Private credit has increasingly become the preferred source of financing for PE sponsors, with direct lending volume jumping 60% over last year’s level.
