Originally published in March 2021.
Like many readers, I took advantage of the best snow in years to go sledging with my daughters. As Daddy bombed down the hill like Bowser in Mario Kart, my mortality flashed before me and I realised I was simultaneously having fun and in great danger.
I was Schrodinger’s dad – contemporaneously dead and alive, the die had been cast, only the outcome was unknown. On reflection, I realised this is the perfect metaphor for the corporate bond market.
Corporate bonds had a near-death experience in 2020. After a decade where credit markets grew to $10tn,borrowing costs spiked as we stared into the abyss of a global economic shutdown (as can be seen on the chart). We had been warning of this for several years and were positioned accordingly – our unconventional credit protection investments almost doubled in Q1 2020 and this allowed our portfolio to remain flat at the March lows when equities were down 30%.
Effective yield on CCC-rated US corporate debt (%)