In this environment, an often overlooked benefit in debt investing is that you aren’t reliant on growth and market multiples to get paid. You need to make sure the company can pay its bills (i.e., the interest payment) and you have risks that must be managed, such as default and interest rate risk, but at the end of the day, a bond has a maturity date at which you get paid back your principal investment, all the while you are clipping coupon payments.
In looking at these risks, we are in a low default environment and expect to remain there for the next couple years. On the interest rate front, while we will likely continue to see some volatility due to the tapering talk, this lack of real economic growth worldwide will be a massive hindrance to a substantial rise in rates.
As we look forward, we expect that the reality of persistently slow global growth to be a significant headwind for the equity markets and multiple expansion. After being up over 32% over the last year and 57% over the last two years (S&P 500 returns), we don’t see a continue rise as substantiated.
On the other hand, we believe that the high yield bond and leveraged loan market are in a sweet spot, as investors here can benefit from a maturity date (and often even an earlier call or tender at a price above par) instead of relying on market movements and psychology for your final pay date, all the while clipping a healthy coupon income.