Market Outlook for Credit: Macro & Fed Policy: - Markets await Powell’s Jackson Hole speech today, a lot of Fed speak that will disappoint markets since he will not likely commit to lowering rates, maintain optionality - Economic growth has slowed (1.2% GDP from 2.4% GDP last year); however, recession risk is very low - Job growth has slowed to 35k monthly average, below the Fed’s full employment objective - CPI remains sticky/elevated (2.75%), but prices are relatively stable along this trend line - Fed Funds too high; higher front-end rate has distorted the yield curve -> V-shaped yield curve is abnormal (4.35% SOFR -- 4.2% T-bills -- 3.75% 2-year UST -- 4.3% 10-year UST) - Market is pricing in 90%+ odds of Fed ease by 25 bps at the September 17th meeting, yet Powell is 50-50% on cutting rates, as he is searching for confirmation of slowing inflation Public & Private Credit: - IG spreads at +75bps, tightest since 1990’s, trading in 0-percentile of spreads - Credit story remains strong: easy financial conditions, solid earnings, improving balance sheets, low recession risk - With IG spreads compressed, HY spreads relatively tight with an OAS of + 285bps - Private credit offers strong risk-reward with higher relative IRR/MOIC compared to public credit markets - Capital allocators will continue to build exposure to credit, both in the public and private markets - IPOs and M&A are picking up with PE sponsors actively perusing exits and new deployment - ABL allows capital allocators to diversify PC exposure with a low correlation coefficient for ABL providing diversification to DL and public credit sectors - Opportunistic credit defined by capital solutions and special situations represents the third leg of the private credit stool with debt that delivers equity-like returns that equates to +200-300bps vs. DL and ABL Take-a-ways: Amid Fed easing and tight public market credit spreads, private credit offers superior risk-adjusted returns including DL, ABL and Opportunistic. The Fed easing cycle should prove beneficial for the economy and the credit markets.
With IG and HY spreads this tight, the relative value case for private credit is compelling. The key will be how allocators balance strong risk-adjusted returns with the need for rigorous credit discipline, especially if Fed easing prolongs liquidity and masks underlying vulnerabilities. #creditrisk
CLO Investing, Trading, Private Credit, Asset Based Lending,Real Estate, Finance, CLO Investing/ Trading, Structured Finance, Real Estate
5dWhile private credit (and I speak for DL which competes with BSL), the general quality of borrowers is lower, the default statistics can be artificially held up ( due to PIKs, amend to extend etc being excluded) and data not always publicly available. BSL and MM loans with MTM provide a daily report card. Both have a place in an investors asset allocation to credit but important to note the extra premium offered in private credit is due to the above and most important of all lack of liquidity when one wants to exit