Taxes are going up, input prices are soaring, consumers are getting hit on various fronts and mounting government debt levels make delevering very challenging, to say the least. The financial markets have done very well up to this point. But the days of everything moving up together are over and an astute investor must navigate through the company specific bombs on the horizon. Now is the time when active management counts and you get paid to be right.
Uncertainty is a constant part of life, and financial markets. The Federal Reserve’s reaction to the current uncertainty is to initiate another round of quantitative easing; however, we don’t expect this to have a meaningful impact in spurring the economy. Yet, we see this slow growth environment as a benefit for high yield corporate bonds and continue to see ample opportunity in this asset class. Additionally, with the high yield market depth and breadth, we believe there are plenty of tools and options available for us to position ourselves in any market.
We believe that we are entering an extended period of low rates and low returns. Treasury yields are near all-time lows and there is no significant growth to drive price appreciation in equities and very low, if any, dividend yields. Given the low returns environment in which we find ourselves, the search for yield is on. In this focus on yield, we urge investors to establish allocations in the high yield bond market at what we believe to be very attractive levels.
While there is some justification for the recent rally in the markets, none of the bigger issues have been dealt with, forget solved. Debt deflation is very real and painful, and will take time to work through. Given the current environment, we must have discipline in our investment decisions and be willing to just say “no” when things get too silly. This is an example of why corporate credit markets must be actively managed.