The third quarter of 2023 saw re-emerged interest rate volatility as continued strong economic numbers reinforced a “higher for longer” expectation for central bank policy. With the front end elevated and dramatic curve inversion, the back end endured the bulk of the bond sell-off. The sell-off brought down the number of rate cuts expected in 2024 and reduced the magnitude of curve inversion.
Risk assets performed remarkably well this quarter with equities and credit spreads generally absorbing the rising yields amid continued resilience in economic data. With all-in yields back at cycle highs and bond prices back at cycle lows, corporate bond investors have been willing to accept tighter credit spreads than many would have expected. We believe the yield vs spread debate continues to favour attractive all-in yields and low bond prices.
Looking ahead we remain constructive on credit, are attentive to spreads and valuations and see outstanding risk/reward in reasonable duration, high quality corporate bonds. In addition, our team continues to focus on finding uncorrelated special situation investments that can provide attractive yield and capital gain potential. We continue to focus our single name shorts to take advantage of potential dispersion, delayed beta as higher rates start impacting businesses and story short situations. We also took advantage of the rally in risk assets to rebalance hedges given macro economic uncertainty and recession risk. Overlay hedging has been focused more towards credit spreads to isolate market expensiveness.