October 5, 2020

Penn Capital Monthly Credit Insights

Profile picture for user Peter Duffy
Peter Duffy, CFA
CIO - Credit, Sr. Portfolio Manager

Penn Capital Monthly Credit Insights ▸ View PDF: Penn Capital's credit review focuses on core credit, interest rate, and yield curve indicators, seeking to assist investors in making disciplined and informed decisions.

 

Credit is the lifeblood of the modern economic system. The analysis of macroeconomic credit fundamentals (liquidity, solvency, interest rates, leverage) can provide equity and credit investors with a disciplined framework for understanding and reacting to market conditions. This is especially true in today's market of record-breaking volatility.


Stock prices are roughly 20 times more volatile than their fundamentals, as noted by economist and best-selling author Robert Shiller, when pointing out the excess volatility could not be explained by the efficient market theory. Excess volatility appears to be derived from behavioral psychology. Credit fundamentals, especially their positive/negative directional momentum, have historically cut through behavioral price noise, offering indication of where we are in the cycle and where we're going.


Credit risk, interest rate risk, and yield curve risk are 3 key components of macroeconomic credit. Penn Capital's weekly credit insights focus on these core factors, seeking to assist investors in making disciplined and informed decisions.


High yield credit, the bonds and loans of companies rated below BBB, provide especially useful indication (such as high yield credit spread movements). High yield credit has historically exhibited earlier and greater sensitivity, and therefore indication, to changes in macroeconomic credit conditions that we believe truly drive the market. For that reason, we emphasize high yield credit in our analysis.