As we all know, it has been a tough start to the year for the markets. Equities are down (SPX down ~9% YTD), credit spreads are wider (HYG down ~5% YTD) and interest rates are up (XBB and ZAG are down about 5% as well YTD).
Unlike last year when interest rates drifted higher and credit spreads were relatively stable, both have been moving higher and wider. It's been a perfect storm with nowhere to hide, but we’ve been there before.
Although we’re holding our own relative to others, our funds are now down between 2.5% and 3% YTD. To be clear this is all mark-to-market, we don’t have any impairments or holdings we’re stressed about.
Given the current scenario, we thought we’d give a bit of perspective on how credit markets perform in down markets and how they tend to mean revert. We’ve used the Credit Income Opportunities to exhibit this, as we have a long history of performance through many market cycles.
The chart below shows the cumulative peak to through drawdowns the fund has experienced over the years (since 2013).
The grey line shows the credit spread for Canadian corporates (Bloomberg Barclays Canada Corporate Index) and the blue line cumulative drawdowns. It should be no surprise, when credit spreads go up (widen), the fund experiences drawdowns. The two lines are like mirror images of each other. That’s normal, that’s the reality of marking securities to market every day.
But what happens once we reach the point where credit spreads stop widening? Recall the Credit Opportunities, Series A was down -6.8% in March 2020. We’ve shown in the table below the cumulative returns of the Credit Income Opportunities, 12 months’ post max drawdown, after the widening in credit spreads subsides. All have been great entry points for investors.
Remember this is fixed income, not equities, where bond prices, over time, return to par, $100.
Of course we can’t predict, nor would we imply with certainty whether or not we have reached the end of this stress in credit, but as you’ve seen in the past, this is what one should expect once the volatility in credit ends. And even if we aren’t done, without a recession, which we don’t expect, investment grade credit spreads are fairly well discounted, they are now back to where they were in 2019 pre-pandemic and much wider than 2021 (Chart Below).
That’s nicely increased the yield on all our fixed income offerings: >3%, 6%, 7% (DBF, Alt, Ops, respectively). And as we’ve stressed there is very limited duration risk in these funds, which in our mind is the biggest risk for fixed income this year.
So yes credit spreads are wider and rates are higher and that dragged on performance, but it's great for new orders and it also works for existing holders, as we deploy cash and re-position the portfolio, just as we’ve done in the past.
Until next month,
The Bond Team: Mark, Etienne and Nick
1 All Ninepoint Diversified Bond Fund returns and fund details are a) based on Series F units; b) net of fees; c) annualized if period is greater than one year; d) as at February 24, 2022 1 All Ninepoint Credit Income Opportunities Fund returns and fund details are a) based on Class F units (closed to subscriptions); b) net of fees; c) annualized if period is greater than one year; d) as at February 24, 2022.
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