In comparison to the roller coaster year that was 2020, 2021 has felt largely uneventful. Solid, steady returns in credit markets have followed a general, yet unfinished, return to normalcy. Many of last year’s major uncertainties have abated and the fundamental backdrop has improved dramatically, leaving spreads near all-time tight levels. While the “easy money” may be behind us, credit investors are not solely reliant on big, market-moving moments to create opportunity. In this note we discuss the opportunities that we see in various through-cycle event-driven credit situations that are less dependent on broad market spread dynamics.
The pandemic — and its resulting market selloff — is a (hopefully) once-in-a-lifetime event that few will soon forget. Last March, opportunities in credit were abundant as risk premiums blew out. Dispersion across industries and ratings lingered for much of the ensuing 12 months but has evaporated in recent months as spreads have tightened to pre-Great Financial Crisis levels. The spread between the highest rated high yield (BB) bonds and the lowest rated (CCC) is at its tightest level since February 2011, and returns for 19 of 21 industries are positive year to date. Considering an allocation to credit right now means contending with the fact that valuations are high and that the broad beta trade has largely played out. In our view, spreads could tighten further, but passive or benchmark-constrained strategies may be facing a predominantly income-based return going forward.
With spreads nearing all-time tights, especially in larger, more liquid parts of the market, and remaining dispersion low, we still see event-driven situations in credit that we believe present opportunities for incremental returns. The phrase “event-driven” may often connote situations such as bankruptcies or distressed transactions, events that are not prevalent in today’s market. However, event-driven investing, at its core, describes opportunities derived from identifying mispriced assets or securities and the catalysts expected to unlock their value. In a tighter market like today, we see opportunities in rising stars and new issuances, including what we expect to be large levels of M&A.
- Credit spreads are approaching all-time tight levels, suggesting that the “easy money” may be behind us.
- We still see opportunities in various through-cycle event-driven credit situations. Specifically, we see opportunities in rising stars and heightened new issuances, including what we expect to be large levels of M&A.