Credit Market Review: Run Credit, Run!

The 1994 American classic film, Forrest Gump, adapted from Winston Groom’s 1986 novel, is a timeless depiction of the important role perseverance can play when navigating the unpredictable journey of life and its hurdles. Forrest, the non-obvious eponymous protagonist, learns that you can leave destiny up to chance, floating where the wind takes you like a feather, or instead use intention and determination to drive outcomes. Forrest’s story captured the hearts and minds of many over the last 30 years as he defied the perceived odds to rise above challenges. His story reminds us of the significant value of being nimble, creative and remaining disciplined can have in what we are calling today’s ‘non-obvious market’.

Forrest’s journey unfolds over the transformative decades of the 1950s, ‘60s, ‘70s, and ‘80s, which allows him to witness and participate in some of the most pivotal moments of recent history. In some ways, the past four years have felt like four decades — global markets have thrown twists and turns that have kept investors on their toes, trying to anticipate what could come next: rate cuts, CPI print, labor numbers!? There has been no shortage of inputs for markets to react to and follow. Some might even say it feels like we have been running behind Forrest for 3 years, 2 months, 14 days and 16 hours as markets have gone up and back, up and back…and we don’t intend to stop!

There is no doubt that the past 36 months have been a memorable and non-linear ride for the global credit markets. “Fixed income” has finally earned its last name back again on the heels of monetary policy tightening sending rates to a 23-year high, with SOFR squarely at 5.33% as of June 12th. We have leaned into this new chapter of history as the global markets evolved into a new paradigm, one characterized by a ‘higher resting heart rate’ for both rates and inflation as our colleague Henry McVey says. Throughout the whipsaw, teams that have exercised discipline and remained structurally nimble within and across public and private credit markets were able to identify relative value amidst growing dispersion, yielding attractive risk adjusted returns and bringing us to where we are today.

We believe we are now squarely in a ‘non-obvious market’ characterized by growing asset level dispersion fueled by an overt focus on spread versus absolute yield, technicals that are increasingly disconnected from fundamentals coupled with the overhang of rapidly developing geopolitical matters. We call it non-obvious because this market requires investors to go beneath the surface to identify compelling relative value and act swiftly because everything can change at a moment’s notice. As one of the film’s most iconic lines states, “…Life is like a box of chocolates, you never know what you’re gonna get.” We believe this sentiment holds true for the credit markets these days and the surprises they can bring.

With this in mind, we address the following themes that stood out to us this quarter: