Why it’s important to “time” your credit exposure (but not how you might think)

For the last 12 months(1) , fixed-rate credit assets have missed the mark, but floating rate has faired better irrespective of credit quality*. Ares Australia Management’s Teiki Benveniste explains why.

“Amid higher inflation and rising rates, the only way assets with fixed coupons can reflect these conditions is through their prices,” he says.

On the other hand, floating-rate coupons (your investment yield) readjust every one to three months. All things being equal, if interest rates rise, so does the coupon.

These characteristics have been clearly demonstrated over the last 12 months(1) as fixed-rate assets underperformed floating-rate assets.

Benveniste explains that there’s a deeper distinction within the fixed rate universe. And that’s duration – whether you’re invested in three- or five-year bonds or perhaps in 10-, 20- or 30-year assets. It’s a way of timing your exposure – though not in the way some equity investors try to time their entry or exit points.

“Investment-grade has underperformed sub-investment-grade, and that’s because IG has about eight years of interest rate duration when high yield has about four years,” he says.

In this video, Benveniste explains the differences between fixed- and floating-rate credit, outlines how changes in rates affect their performance and discusses how Ares Australia Management is positioned.

Consistent income throughout market cycles

To learn more about how Ares Australia Management navigates inefficiencies in the market to generate attractive, income producing portfolios please visit their website.

Managed Fund

Ares Global Credit Income Fund

Global Fixed Income

View

(1) As at 31 January 2022

*As highlighted by the performance of the Bloomberg Global Aggregate ex Treasury Index hedged into AUD, composed of mainly IG fixed rate bonds vs. the CS Leverage Loan Index which is composed mainly of floating rate instruments.