About this episode:
In this episode, Kara O’Halloran, Director, Investment Research, and Robert Hoffman, Managing Director, Investment Research, share their points of view on misconceptions surrounding credit markets and what these markets look like today. Kara and Robert discuss their predictions for what the rest of the year holds for credit markets.
Kara O’Halloran (00:05):
Welcome back to FireSide, a podcast from FS Investments. My name is Kara O’Halloran. I’m a director on our investment research team here. And today we have a full episode focused on credit markets. We’ve talked about credit a bit in some of our research roundtable episodes, but we haven’t devoted a full show to the topic yet. And when I say credit, I should make it clear, right off the bat, we pretty much mean sub-investment grade, so, high yield bonds and senior secured loans. But specifically today we are myth-busting. So, we’re going to go through some of the common misconceptions we’ve heard about credit over the years, and some of the ones that we’re specifically hearing a lot in today’s environment, and there is nobody better to do this with than Rob Hoffman, who is the head of our research team here, but in a prior life was a credit trader and portfolio manager. Rob, thanks for joining.
Robert Hoffman (00:52):
Hey, thanks for having me, great to be here.
Kara O’Halloran (00:55):
You’re ready to myth-bust a little bit?
Robert Hoffman (00:56):
Yeah, let’s do it. Let’s do it.
Kara O’Halloran (00:58):
Perfect. So, before we get into it, let’s set the stage a little bit, as always. We’re recording on August 24th, and man, does it feel like late August right now? And in some ways it’s felt a little bit like late August in credit markets all year. We have talked about how high yield bonds and senior secured loans, they’ve had a good start to the year. They’ve had pretty stable, predictable returns. We’ve seen that change a little bit in recent weeks, which we will get to, but Rob, catch us up on what credit markets are doing broadly right now.
Robert Hoffman (01:29):
Yeah. It’s interesting. Much of our forecast for the year has been predicated around the income that the markets generate, somewhere around 1.4%. 0.25% for high yield, 1% to 1.1% for loans, combined with a little bit of spread tightening. And really that was our call from the beginning of the year with the idea that markets are a little bit more optimistic, and growth is strong, and people are feeling a little bit better. And when we looked at where spreads were at the beginning of the year, we felt that there was room to tighten. I think that’s still largely… What we think about today and looking at the market, that being said, we have seen a little bit of a pause into the third quarter. Spread tightening has turned into a little bit of spread widening, like 15 basis points’ worth. So, it’s not really anything major-
Kara O’Halloran (02:30):
One of the most major things that’s happened this year in credit.
Robert Hoffman (02:33):
I think one of the headlines is, “Spreads are at their widest level since March” or something like that, but you’re not talking about very big moves and numbers. And I think that you saw a lot of that spread tightening in Q1, and kind of held that throughout Q2, and now we’ve seen a little bit of widening into Q3, but it has impacted the numbers. High yields currently negative on the month through the 24th. So, that would be the first negative month since September of last year or something like that. But I don’t think anything’s really fundamentally changed-
Kara O’Halloran (03:07):
Yeah. And I think drilling down, if you look at where we’re seeing the spread widening, it’s almost like a mini COVID trade, it’s like broadcasting, which is live events and stuff like that. So, kind of things that we would expect given some of the concerns around the Delta variant-
Robert Hoffman (03:20):
Yeah, I think that’s right. I mean, we’ve seen weakness in energy, weakness in gaming and leisure, and very much, to your point, I think it corresponds… I mean, look, equity markets, things are moving pretty quick. So, we had had a few days of sell-off in equity, which kind of makes sense, COVID scare, and what’s the Fed going to do. But then yesterday equity market’s really strong. Today, markets are strong again, equities could close at all time highs today. So, you see these little periods, these little cycles that are happening within the market. But I think it’s consistent. I think there is definitely a moderate feel of apprehension around risk that’s come into the market over the past six to eight weeks. And we’ve kind of seen that impact credit markets as well.