Halfway Up the Mountain

“The upper world,” said Hermes indicating the source of the light….Sisyphus put his shoulder to the rock and began to push it up the slope. Halfway there and he was confident that life eternal was assured.

- Adapted from Mythos, Stephen Fry

Here at the halfway point of 2024, the light of investment heaven shines brightly from the mountain top, even as the heat of summer drips sweat off the brow of those of us laboring to get our portfolio rocks to the top.

From a macro market standpoint, equities and gold are on a tear, up double digits to start the year. Commodities are serviceable at better than a 5% total return in the first six months. And of course, cash is 2 ½% positive on its steady path as well. But bonds in aggregate (….and you just have to stop for a moment and really appreciate that pun!) are in the red at the halfway point. The long bond is still suffering the tortures of duration in this higher for still longer environment, but even the moderate duration Agg finds itself a few bps short of flat heading into the real heat of summer.

(Yet) This time is different…

….begins the article in Bloomberg extolling the virtues of putting bonds and other debt strategies into portfolios at his point in the cycle. “Starting yields are highly predictive of bond returns over a multiyear horizon,” quote sources for the article.

Source: Bloomberg. Mackenzie, M. 2024, June 4. https://www.bloomberg.com/news/articles/2024-06-04/pimco-says-generational-reset-on-yields-to-spur-a-bond-revival

And it is not just the very short end of the market that offers a 5 -handle now. In a recent market note, Barings commented on investment grade corporates, stating, “…yields across the asset class haven risen to 5.43%, a level….nearly double the 10-year average.”

IG Yields Remain Near Record-Highs

From a total return standpoint, U.S. Investment Grade, as tracked in the Destra Credit Strategies Indicator (“CSI”) are a few bps to the positive year to date: +0.66%. With the underlying instruments in investment grade strategies sporting 5%+ yields, is now a good time to join Sisyphus at pushing bond boulders halfway up the portfolio hill?

Quality AND Quantity

In a very interesting technical note, Torsten Slok of Apollo points out that while there is a lot of investor interest in high yield, leveraged loans and private credit, the investment grade corporate market has exploded in the last 14 years and now dwarfs the size of the lower rated parts of the credit marketplace.

Despite the huge growth of the investment grade market, year to date in 2024, it is the riskier U.S. High Yield and Senior Loans that are delivering better returns : 2.75% and 4.36% respectively as investment strategies.

Risk, Rewarded In Credit Strategies YTD

Looking across all 18 categories that make up the Destra Credit Strategies Indicator, we see that only three are negative year to date : International Investment Grade, down -2.02%, Mortgage Backed Securities -0.86%, and Municipals -0.06%.

The other 15 strategies are all in the green, with some of the riskier (by credit rating and structure) delivering the best performance through 6 months. BDC strategies lead all by a wide margin with a 10.84% return, followed by Structured Credit Junior strategies (think CLO equity tranches and regulatory capital relief trades) up 7.57%.

Emerging Market High Yield strategies, Preferreds, and Special Situations Credits all have returns above 5% YTD delivering 5.94%, 5.49%, and 5.15% respectively through the end of June.

Summer Investing Is Sirius Business

It looks like more than credit markets will be hot this summer. Inflation, GDP, unemployment, equities, energy, the wars in Ukraine and Gaza and of course politics all look to keep the heat on through the “dog days” of summer. We will be back in August to report on how credit markets and investing in general have held up in the heat of July.

If you are going to get some time away at the beach, a lake house, or just relaxing at home, a great summer read is Mythos by Stephen Fry. It is highly recommended, light reading and quite interesting with not a few ancient Greek myths that ring so very true, even today.