Q&A with Mike McEachern – March 2021

Co-Head of Public Markets Mike McEachern discusses his thoughts around the recent rate rises in the US and Europe, the impact on multi-asset credit strategies and where he sees the potential for future investment opportunities

With the recent rise in rates and fears for a long-term move higher in inflation, how are you positioning your multi-asset credit strategies?

I think we are on the verge of a much larger reopening of economies on a global basis. While it is just starting to become apparent in Europe, in the US it is well underway which has culminated in stronger-than-expected economic data and increased pressure on rates.1

While Muzinich has been preparing for a move higher in rates for some time, I believe it is surprising how fast US and European rates have moved. I have also questioned how high can rates go in the long end and is there enough room in credit spreads to offset rising rates with tighter spreads?

For the first two months of the year, the situation played out as I expected, where strong fundamentals would keep credit in a position where there were less sellers and therefore spreads tightened, which is what happened.2 Spreads in lower-quality credit tightened even more.3

The trend was something I had anticipated; higher rates, with more sensitive areas of credit such as high yield, investment grade and bank loans doing the best.4

However, what we have seen in March is there is only so much credit spreads can handle. Now we are seeing flat spreads in the face of rising rates, and therefore negative returns and spread widening in some areas such as emerging markets.5

The goal for our multi-asset credit strategies in the first few months of the year was to stay away from rates and be closer to flat. I believe we did that, by getting duration down in investment grade and high yield, where our high yield positioning was closer to short duration and we also held more cash. We increased our exposure to loans and in short duration banks.

In March spreads are generally unchanged to wider (as of 9th March 2021), although lower-rated high yield (B and CCC rated bonds) has continued to perform well.6 As an asset class European high yield is slightly higher, while every other credit market is generally down, in my view, because of rates, spread widening or because spreads are not tightening.7

Where do you see rates going from here?

I believe rates could remain on hold for now, because of the approximate 60bps move in the 10yr US Treasury year to date.8 We are now seeing large negative returns in US investment grade which is down around 4.5% year to date, and I would expect rates to stabilise and returns to level off.9

In my opinion a lot of bearish data around the economic reopening surge and higher inflation is embedded in rates now. We are already seeing strong growth in GDP printed in the US and some resurgence in inflation.10 US Federal Reserve Chair Powell has already mentioned that, and it spooked markets.11 There is still definite risk to the upside on rates, but I think rates could be range bound in the near term.

Meanwhile in the market, volatility due to a rotation from technology to value-oriented and ‘reopening’ credits has repriced a lot, but this volatility has put pressure on spreads, in my view. I have also seen a lot of activity in the new issue market in the US and Europe, which I believe has put a lid on secondary prices. I am surprised that high yield has hung in this well (i.e., is not down as much in performance terms), which is a good sign.12

Looking ahead I believe rates will be range bound for the near term as a significant repricing has occurred, but the risks are still skewed to the upside as we expect the economic news flow to be overwhelmingly positive as the global economy marches to a full reopening.

Another move higher in rates could represent what I believe to be an attractive entry point to add duration as my longer belief is that economic growth and inflation will revert to the more benign trends prior to the start of the pandemic.

What kind of performance do you expect from investment grade and high yield in the months ahead?

As a firm we are positioned for rates to move higher, which will, in my view, likely be a good opportunity for high yield to outperform. For our multi-asset credit strategies, we would like to minimise drawdown from investment grade and make some return from high yield, which I believe is more challenging if the only credits performing are B and CCC rated bonds.

We have seen some repricing in investment grade, and it is likely that long-duration investment grade may provide an interesting entry point in the higher-quality end if rates experience another move higher. Meanwhile we are likely to maintain our current position in our multi-asset credit strategies, unless we see another move higher in rates, which would be the catalyst for a portfolio repositioning into longer-duration assets.

1.https://www.cnbc.com/2021/03/02/10percent-gdp-growth-the-us-economy-is-on-fire-and-is-about-to-get-stoked-even-more.html, 2 March 2021,
2.ICE BofA ML Global Corporate & High Yield Index (GI00), ICE BofA US Dollar Global High Yield Index (HWUS), as of 28th February 2021
3.ICE BofA US Dollar Global High Yield Index (HWUS), as of 9th March 2021
4.ICE BofA ML US Corporate Index (C0A0), ICE BofA US Dollar Global High Yield Index (HWUS), S&P Leveraged Loan Index (SPLGAL) as of 28th February 2021
5.ICE BofA ML Global Corporate & High Yield Index (GI00), BofA 10-Year US Treasury Index (GA10), BofA Emerging Market Corporate Liquid Index (EMLC), as of 9th March 2021
6.ICE BofA ML Global Corporate & High Yield Index (GI00), ICE BofA ML CCC and lower Euro High Yield Index (HE30), ICE BofA ML Single-B Euro High Yield Index (HE20), as of 9th March 2021
7.ICE BofA ML Euro High Yield Index (HE00), as of 9th March 2021
8.BofA 10-Year US Treasury Index (GA10), as of 9th March 2021
9.ICE BofA ML US Corporate Index (C0A0), as of 9th March 2021
10.IBID
11.https://www.cnbc.com/2021/03/04/fed-chairman-powell-says-economic-reopening-could-cause-inflation-to-pick-up-temporarily.html, 4th March 2021
12.ICE BofA ML US Cash Pay High Yield Index (J0A0), as of 9th March 2021

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Muzinich & Co. referenced herein is defined as Muzinich & Co., Inc. and its affiliates. This document has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past results do not guarantee future performance. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall. This document and the views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity; they are for information purposes only. Opinions and statements of financial market trends that are based on market conditions constitute our judgement as at the date of this document. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. Certain information contained in this document constitutes forward-looking statements; due to various risks and uncertainties, actual events may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained in this document may be relied upon as a guarantee, promise, assurance or a representation as to the future. All information contained herein is believed to be accurate as of the date(s) indicated, is not complete, and is subject to change at any time. Certain information contained herein is based on data obtained from third parties and, although believed to be reliable, has not been independently verified by anyone at or affiliated with Muzinich and Co., its accuracy or completeness cannot be guaranteed. Risk management includes an effort to monitor and manage risk but does not imply low or no risk. Emerging Markets may be more risky than more developed markets for a variety of reasons, including but not limited to, increased political, social and economic instability; heightened pricing volatility and reduced market liquidity. In Europe, this material is issued by Muzinich & Co. Limited., which is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ. Muzinich & Co. Limited. is a subsidiary of Muzinich & Co., Inc.  Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission. Muzinich & Co., Inc.’s being a registered investment adviser with the Securities Exchange Commission (SEC) in no way shall imply a certain level of skill or training or any authorization or approval by the SEC.

Index Descriptions

HWUS – ICE BofA US Dollar Global High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic and eurobond markets.  Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch).  In addition, qualifying securities must have at least one year remaining term to final maturity, at least 18 months to final maturity at point of issuance, a fixed coupon schedule and a minimum amount outstanding of $250 million.  Eurodollar bonds (USD bonds not issued in the US domestic market) and 144a securities (both with and without registration rights) qualify for inclusion in the Index. Original issue zero coupon bonds and pay-in-kind securities, including toggle notes, also qualify for inclusion.  Contingent capital securities (“cocos”) are excluded, but capital securities where conversion can be mandated by a regulatory authority, but which have no specified trigger, are included.  Other hybrid capital securities, such as those issues that potentially convert into preference shares, those with both cumulative and non-cumulative coupon deferral provisions, and those with alternative coupon satisfaction mechanisms, are also included in the index.  Callable perpetual securities qualify provided they are at least one year from the first call date.  Fixed-to-floating rate securities also qualify provided they are callable within the fixed rate period and are at least one year from the last call prior to the date the bond transitions from a fixed to a floating rate security.  $1000 par preferred and DRD-eligible, securities in legal default, equity-linked securities, and hybrid securitized corporate securities are excluded from the Index.

GA10 – ICE BofA Current 10-Year US Treasury Index is a one-security index comprised of the most recently issued 10-year US Treasury note.  The index is rebalanced monthly.  In order to qualify for inclusion, a 10-year note must be auctioned on or before the third business day before the last business day of the month.

GI00 – The ICE BofA ML Global Corporate & High Yield Index tracks the performance of investment grade and below investment grade corporate debt publicly issued in the major domestic and eurobond markets. Qualifying securities must be rated by either Moody’s, S&P or Fitch, have at least one year remaining term to final maturity, at least 18 months to maturity at point of issuance and a fixed coupon schedule.

SPLGAL – The S&P Global Leverage Loan Index is designed to measure the performance of the global senior loan market.  This fixed-weight index is 75% weighted in the S&P/LSTA Leveraged Loan Index and 25% weighted in the S&P European Leveraged Loan Index. 

EMCL – The ICE BofA ML US Emerging Markets Liquid Corporate Plus Index tracks the performance of the U.S. dollar denominated emerging markets non-sovereign debt publicly issued in the major domestic and eurobond markets. Qualifying issuers must have risk exposure to countries other than members of the FX G10, all Western European countries, and territories of the U.S. and Western European countries.

HE30 – The ICE BofA ML CCC and lower Euro High Yield Index is a subset of the ICE BofA ML Euro High Yield Index (HE00) including all securities rated CCC1 or lower.

HE20 – The ICE BofA ML Single-B Euro High Yield Index is a subset of the ICE BofA ML Euro High Yield Index (HE00) including all securities rated B1 through B3, inclusive.

HE00 – The ICE BofA ML Euro High Yield Index tracks the performance of EUR dominated below investment grade corporate debt publicly issued in the euro domestic or eurobond markets. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of EUR 250 million.  

ICE BofAML US Corporate Index (C0A0) ICE BofAML US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250 million. Original issue zero coupon bonds, 144a securities (with and without registration rights), and pay-in-kind securities (including toggle notes) are included in the index. Callable perpetual securities are included provided they are at least one year from the first call date. Fixed-to-floating rate securities are included provided they are callable within the fixed rate period and are at least one year from the last call prior to the date the bond transitions from a fixed to a floating rate security. Contingent capital securities (“cocos”) are excluded, but capital securities where conversion can be mandated by a regulatory authority, but which have no specified trigger, are included. Other hybrid capital securities, such as those issues that potentially convert into preference shares, those with both cumulative and non-cumulative coupon deferral provisions, and those with alternative coupon satisfaction mechanisms, are also included in the index. Equity-linked securities, securities in legal default, hybrid securitized corporates, eurodollar bonds (USD securities not issued in the US domestic market), taxable and tax-exempt US municipal securities and DRD-eligible securities are excluded from the index.

J0A0 – The ICE BofA ML US Cash Pay High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt, currently in a coupon paying period that is publicly issued in the US domestic market.  Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250 million.