FEG saw this wave of willing lenders come to market and chose to defend ourselves and our clients from the onslaught by focusing on seasoned leveraged finance professionals who had inadvertently fallen under the new direct lending umbrella. Hundreds of private lenders calling themselves “direct lenders” have come into the market over the past five to seven years. With the Volcker Rule, regulators pushed SIFIs out of higher risk-seeking activities, leading to an environment where a large swath of companies needed to rely more heavily on non-bank lenders. Still, it has moved to the forefront over the past 5 to 7 years as yield-starved investors have become more comfortable with draw-down structures and the promise of larger coupons and higher yields than those offered by the public credit markets. The world of leveraged finance and shadow banking has been around for a long time. With asymmetrical risk facing fixed income investors, the bond market is a tough place for a would-be bond king or distressed queen to generate meaningful alpha in a world offering pork & beans. Corporate and consumer credit spreads remain tight despite the volatility experienced thus far in 2022, and the Fed has prepared market participants for the beginning of the next rate hiking cycle. Pork & BeansĪt the time of this publication, the Agg yield is below 2%, and the effective duration is closing in on 7 years, representing considerable sensitivity to U.S. While there was no major distressed cycle during the decade, there were ripples, as the 2010s also brought the first taper tantrum and a collapse of energy prices that caused bond spreads for energy issuers to reach distressed levels. The 2010s saw no major distressed cycle, but instead brought the “normalization” of a massive Federal Reserve Balance sheet-a balance sheet that has proven resilient to past Fed tapering efforts and still weighs on the potential growth prospects for the U.S. Distressed kings like Howard Marks (Oaktree), John Paulson (Paulson & Co), Josh Friedman (Canyon), and Victor Khosla (SVP Global), and distressed “queens” like Maria Boyazny (then of Siguler Guff) managed funds meant to capture the breadth of the distressed opportunity, and most were largely successful. SIFI balance sheets had become bloated and over-levered to sub-prime mortgages and other credit investments. The Great Financial Crisis (GFC) of 2007-2008 brought a proliferation of niche credit strategies focused on taking advantage of the “distressed opportunity of a lifetime.” Both broad and niche markets were dislocated amid the forced reduction of risk-taking-eventually codified by the Volcker Rule-by systemically important financial institutions (SIFIs). The Great Financial Crisis and the 2010 s Thrill-seeking contrarians like Jim Grant from Grant’s Interest Rate Observer, pleaded for higher rates time, and again, only to remain befuddled by still-lower rates and below-trend growth. Most investors at the time did not believe another 20+ years of duration tailwind was to come (Phase 2), which ultimately proved to be the right call. #Jim fink options for income review full#The “duration tailwind” that began with the Paul Volcker Federal Reserve (Fed) of the early 1980s was in full swing by the early 2000s (Phase 1), helping the rock stars of fixed income add alpha relative to the Agg and zeros to their bank accounts. Bond “kings” past and present like Bill Gross (PIMCO), Jeffrey Gundlach (then of TCW), Larry Fink (BlackRock), and Dan Fuss (Loomis Sayles) were viewed by televised business media as rock stars, and investors hung on their every word. By comparison, today the effective duration is 6.8 years. The effective duration, or interest rate sensitivity, of the Agg at that time was less sensitive to interest rates at around 5 years. Aggregate Bond Index-known to fellow curmudgeons as the “Lehman Agg” or “the Agg.” Then, as now, core managers looked to provide “alpha” primarily through sector rotation, security selection, yield curve positioning, and duration management. In the early 2000s, the fixed income landscape consisted primarily of clients using actively managed “core” fixed income managers who ran portfolios benchmarked to the Bloomberg Barclays U.S. Before getting to our 2022 fixed income outlook, a brief review of fixed income’s evolution over the past 20+ years will set the stage. As I enter the remaining years of my investment career, I can see the fixed income investment landscape facing investors today through the lens of a seasoned skeptic, a curmudgeon. In my personal search for the American Dream, I have dealt with good times and hard times and have greatly enjoyed helping clients navigate multiple economic and credit cycles. My experience at FEG has allowed me to meet and dine with bond kings and distressed queens after starting out in an empty apartment, eating pork & beans.
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