ITJTY - CrossingBridge Advisors Q4 2023 Commentary

2024-04-10 10:00:00 ET

Summary

• CrossingBridge Advisors, LLC is a wholly-owned subsidiary of ENDI Corp. CrossingBridge’s investment strategies are as follows: ultra-short duration, low duration high yield, responsible credit, and special purpose acquisition companies (SPACs).
• Many fixed income investors seem focused on capturing the benchmark rate of return yet are failing to acknowledge that on-the-run credit spreads are very tight and may be undercompensating for risk.
• Robust economy - Inflation may reignite causing rates to rise and bond prices to fall.

Getting off the Bench(mark)

The recent NCAA college basketball tournaments remind us that players regularly come off the bench to give their teams an extra boost. Many fixed income investors seem focused on capturing the benchmark rate of return yet are failing to acknowledge that on-the-run ¹ credit spreads are very tight and may be undercompensating for risk. ² In this market, with all of its uncertainties, it is imperative that credit investors get off the bench and find better ways to invest in fixed income. Moreover, just as in basketball, this market will require both a strong defense, to protect capital, and an offense ready to identify and take advantage of scoring opportunities.

Option-Adjusted Spread (OAS) as % of Yield-to-Worst (YTW) ³

Fewer scoring opportunities - As shown above, credit spreads are near historic lows and, as a percentage of the total yield, ⁴ at their lowest level since the first half of 2007. Assuming everything goes according to the game plan, debt investors' expected return is highly correlated to U.S. Treasuries of similar maturity with little value associated with underwriting credit risk. This creates a conundrum for investors with disparate outcomes depending on the economy:

• Robust economy - Inflation may reignite causing rates to rise and bond prices to fall.
• "Soft Landing" - Investors' returns are similar to movement in Treasury rates.
• Weaker Economy - Credit spreads widen, likely causing corporate bond prices to fall.

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