Buying opportunities from market dislocations now last for weeks, not months. A massive $7 trillion in money market funds is waiting to be deployed, causing dips to rebound with unprecedented speed. This environment demands faster, more tactical investment decisions.
Unlike the dot-com bubble's weak issuers, the current AI debt boom is driven by investment-grade giants. However, the risk is that these stable companies are using debt to finance speculative, 'equity-like' technology ventures, a concerning trend for credit investors.
The high-yield market's credit quality is at an all-time high, not due to broad economic strength, but because of a massive influx of 'fallen angels.' Downgrades of large, formerly investment-grade companies like Ford and Kraft Heinz have structurally improved the overall quality of the index.
The massive growth of private credit to $1.75 trillion has created an alternative financing source that helps companies avoid default. This liquidity allows them to restructure and later refinance in public markets at lower rates, effectively pushing out the traditional default cycle.
A key reason the U.S. avoided a recession is its mortgage structure. With 64% of U.S. mortgages fixed at 3.5% or lower, consumers were shielded from rate hikes that crippled European households, where over 80% of mortgages are floating-rate, thereby sustaining consumer spending.
A flood of capital into private credit has dramatically increased competition, causing the yield spread over public markets to shrink from 3-4% to less than 1%. This compression raises serious questions about whether investors are still being adequately compensated for illiquidity risk.
In a tight-spread environment, CIO Dave Albrecht favors high-quality asset-backed securities (ABS). For instance, AA-rated ABS backed by franchise lease receivables from brands like Dunkin' Donuts offer upper-4% yields for two-year paper, providing better relative value than similarly rated corporate bonds.