Short duration BB-B bonds continue to exhibit top ranked risk-return. To illustrate the extent of this anomaly, we’ve compared the ICE BofA BB-B 1-3Y index to every market index within the Morningstar Direct database. We believe this is due to fundamental characteristics of the asset class paired with key market inefficiencies. Neither of which appear to be going away any time soon.
A pain trade appears imminent for investment grade bonds, where the market delivers the maximum amount of pain to the most investors of an extremely popular asset class.
A loan fund’s size and investment opportunities are negatively correlated. This makes capacity constraint a key factor, allowing for high conviction focus on quality opportunities.
Short duration bonds have a Trojan horse. Long maturity bonds often masquerade as short duration. With a minor price change, a short duration bond with a long maturity can become long duration, revealing far more risk than originally indicated.
Equity has a credit blind spot. 95% of Russell 3000 companies issue debt, 75% of which is sub-investment grade. Equity investors study stock price movements but often ignore credit market signals.
Smart yield still exists. Short duration BB-B corporate bonds are providing high yield, downside protection, and interest rate protection in an ultra-low yielding environment. Yet the bonds remain largely overlooked by the industry.
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