A September to Remember

A September to Remember

September has historically been the cruelest month for stocks (on average) going back decades. And credit often plays sympathy to the devil of equities, especially on the downside. But this September saw stocks and credits soar in a devil may care, rally.

Destra Credit Strategies Indictor

The Destra Credit Strategies Indicator (“CSI”) was almost all green in September with 17 sub-categories delivering positive total returns for the month and all 18 posting positive returns year to date. September saw the Preferreds category deliver the best total return in the month by long shot, up a whopping +2.71%. Bringing their year to date results up to +12.47%.

Risk usually drives returns, but it is hard to envision a more disparate set of “risks” than those that underlie the top three performing credit categories year to date. Emerging Market High Yields are doubly blessed with both country risks and corporate risks. BDCs are typically providing credit to middle market firms in the US that otherwise would not have much access to credit markets. And Preferreds of course, are dominated in issuace by really big banks and insurance companies that are heavily regulated and generally investment grade, at least at the senior level of their debt issuance. Yet, these three seemingly different risk profiles have all resulted in 10%+ total returns within their respective credit categories through the end of September.

More Where That Came From

The Fed delivered the first rate cut in years in September. The cut itself was long and well telegraphed in advance so the markets generally had the entire summer to get used to the idea. The size of the cut, 50 bps, was a bit of a toss-up leading into the mid-month announcement, but even the ½ point scale was not shocking to anyone. If the Fed is trying to go out of its way to suggest its future moves, it is working. According to a recent University of Michigan Consumer Confidence Survey, 55% of Americans expect that interest rates will continue to come down. That is the most since the survey began keeping this stat in the late ‘70’s.

Is Bond Upside Priced In?

Equity investors know the old adage, “the starting price (P/E) of new stock investments almost preordains the expected results for the next 5 to 10 years.” If you take that same thinking to bonds, then the opportunity set still looks very enticing. Sifting through Bloomberg and MacroBound data, Manulife highlights this in the chart below. Global and US investment grade indexes look statistically cheap on price, while even high yield is not overpriced at this point.

Small Troubles, Big Opportunities

But while a lot is going right for debt instruments and the strategies that invest in them right now, there are still pockets of turbulence. This recent graphic from Bespoke points out that bankruptcy filings are up meaningfully over the last three years. Yet the number of firms with larger than $50M in liabilities entering bankruptcy are modest (at 41 year to date) and declining. This suggests that there will be plenty of “feedstock” for distressed and special credit investing strategies, but they will need to focus on small and middle market firms to find a lot of opportunities. This is achievable for distressed debt experts that are investing a few hundred million up to a billion or so in capital -- but for some of the most famous firms in the business, that have attractive multi-billion dollar distressed fund raise ups in the last year or so, finding enough “deals” to invest all that capital may prove very challenging.

Source: Bespoke Investment Group, https://www.bespokepremium.com/the-closer/the-closer-meta-bankruptcies-cfo-survey-9-25-24/

Well, September turned out to not be so bad for markets after all. Let’s see if the positive vibes continue through October. Credit Events will be back with our spooky Halloween review of credit strategies after October 31^st. Until then, stay out of the candy bags you brought home from Costco over the weekend.