Being fixed-income investors ourselves, we often speak with members of our clients’ teams who focus on fixed income. The challenge they most often pose to our core view is that they hear that “all is well in high-yield” from other managers. We simply do not agree with that view. We see signs of looser covenants, potential for lower recoveries and, most importantly, leverage creeping higher. Of all the fundamentals we monitor, this is the most important one. As the new issuance market reopens, we expect to see this tested. More on this next month.
In the past, if one wished to see the first signs of stress and distress in economies, one needed to watch banks and their reporting on provisions. The emergence of securitization enabled us to monitor consumer behavior more carefully (for those of you who have seen The Big Short, we are referring to remittance data). Credit-card debt and car loans are normally the canary in the coal mine. Everything looks disturbingly good there now. We will provide you with an analysis of Q4 2022 bank reporting in the next edition.
This is of greatest concern. Not only have we barely seen any writedowns in this sector, there in fact has been little or no repricing of the credit risk premium within the less well-established pockets. This is one area where our concern is growing.