Directionless Inflation And Unappealing Corporates

Directionless Inflation, Burning Buildings, and Unappealing Corporates
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Fixed income investors, pay attention. There’s no playbook for what a post-pandemic recovery should look like, says Jeff Rosenkranz, fixed income portfolio manager at $3.8 billion Shelton Capital Management.

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Q2 2021 hedge fund letters, conferences and more

Unlike prior emergences from recessions, the average consumer is in excellent financial condition on account of forced savings from an inability to spend, the wealth effect from the rise in asset prices, low interest rates, rising home prices, and a strengthening job market.

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However, the incoming economic data will likely be all over the map. Expanded jobless benefits are distorting the employment picture, and shortages in labor, material and logistics capacity are keeping a lid on raging demand. Amid these muddy waters, the willingness and ability to be tactical continues to be crucial.

Directionless Inflation

Shelton continues to believe it’s nearly impossible to have strong conviction in any direction on the transience or persistence of inflation and thus the level of interest rates. Instead, Rosenkranz is hedging interest rates and investing in credit via undervalued, mis-priced, complex, out-of-favor and otherwise underpriced securities to generate total returns.

“Run into Burning Buildings”

This is a contrarian investors market and Rosenkranz is finding cheap bonds—because they are non-index/ETF, out of favor, complex, misunderstood, going through secular or regulatory changes, are in a restructuring process, or other reasons.  It’s a repeatable process that can generate attractive risk-adjusted returns throughout the cycle.

The Covid Anomaly

Last March/April drawdown was a once-in-a-cycle buying opportunity, says Rosenkranz. April 2020 completely distorted Morningstar’s risk adjusted return calculations and star rating, even though it has led to tremendous outperformance since then.

Unappealing New Issue Market Corporates

The corporate credit markets continued to gather substantial assets, while at the same time supporting record levels of new issuance. Why Rosenkranz finds the quality and mix of recent new issues to be mostly unappealing, especially when compared to the incredible opportunities during 2020 and the early part of 2021.

Munis, Infrastructure

Infrastructure will have both municipal issuers and investors watching closely as the ultimate features of the plan and its financing sources could alter the supply/demand technical landscape of the municipal market. What are the ramifications for investors?

Tax Man Cometh

Changes to tax policy may also affect the demand side of the municipal bond market. Expectations of increases in personal and corporate tax rates as initially proposed by the Biden administration provided additional support for recent interest in tax-exempt bonds. However, potential push-back on these proposals as part of negotiations over the infrastructure plan and other administration initiatives could temper demand. In addition, the “Global Minimum Tax” plans can also impact demand for tax-exempt bonds among important institutional investors including banks and insurance companies.

Rosenkranz has over 23 years of experience investing in the credit markets, with an emphasis in high yield, distressed debt and special situations. Prior to joining Shelton Capital, he worked at Cedar Ridge Partners, LLC, Cooperstown Capital Management, Durham Asset Management, The Delaware Bay Company,  and Ernst & Young LLP. He earned an MBA from the Stern School of Business at New York University and received a B.A. from Duke University.

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