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re: Time to go longer duration?
Posted on 10/26/23 at 12:00 pm to Big Scrub TX
Posted on 10/26/23 at 12:00 pm to Big Scrub TX
quote:
quote:
Floating rate funds. It’s in bank loans usually. So the rates the banks can give on a money market (5%) is because they are receiving 7-10% on interest on loans. You can invest in those high interest loans during high interest rate environment times.
There are funds that package these into CLOs that are yielding 20% now.
Not exactly, there are funds that buy the equity tranches of CLOs (which these loans are packaged into), these funds (assuming we are talking about the same ones), yield ~20%
1
Posted on 10/26/23 at 12:38 pm to lynxcat
quote:
1. Are you shifting into longer duration fixed income?
2. Why?
3. If so, how are you executing it? US Treasuries, Agg Bond Funds, Muni Bond Funds?
1) Not yet
2) yields are similar to MMMFs and there's a probable chance for oil to rip higher causing a further increase in long rates
3) On a Fed pivot I'd get into longer duration Treasuries
Posted on 10/26/23 at 12:40 pm to wutangfinancial
i bought TLT 20yr plus etf late Sept - have gotten walloped...but think it will be good near term
Posted on 10/26/23 at 1:01 pm to whodatigahbait
quote:Correct, was using shorthand (although there is a name or two that actually does the bundling themselves - but all they end up retaining is the equity).
Not exactly, there are funds that buy the equity tranches of CLOs (which these loans are packaged into), these funds (assuming we are talking about the same ones), yield ~20%
Posted on 10/26/23 at 2:33 pm to hubreb
I might use TLT calls over buying bonds it’s a good way to preserve cash
Posted on 10/26/23 at 2:36 pm to Big Scrub TX
quote:
Not exactly, there are funds that buy the equity tranches of CLOs (which these loans are packaged into), these funds (assuming we are talking about the same ones), yield ~20%
Correct, was using shorthand (although there is a name or two that actually does the bundling themselves - but all they end up retaining is the equity).
pretty bold move given the leverage in the CLO market, they have held up through every cycle the last 20 years -- but think pretty risky given where rates are and what inflation is
i sold some CDO equity back in the day -- those guys got crushed / although much crappier asset than CLO
Posted on 10/26/23 at 2:52 pm to hubreb
quote:I'm not sure exactly what you mean. It's all floating-rate, so where does your worry about rates come in? CLO equity in general is up pretty good since early 2022 when the rates hiked started. Compare that to almost any other fixed income over the same time period.
pretty bold move given the leverage in the CLO market, they have held up through every cycle the last 20 years -- but think pretty risky given where rates are and what inflation is
And what is your fear of inflation on the trade?
The leverage you refer to is inherent in the structure. But the only thing that actually matters is realized defaults - that is, payments not actually coming through. These things are absolutely spewing cash - as the underlying borrowers are all still paying (1% default rate at present). And even if the market hits distress, as long as the CLO is still in its investment period, that's usually GOOD news - as they can go buy loans at cents on the dollars. And to the extent those loans ultimately pay off in full, the CLO "builds par" - 100% of which flushes to the equity.
quote:Yeah, not even comparable, really. CLO tranche prices traded down HUGE in the GFC. But unlike mortgage ABS, almost all of it survived.
i sold some CDO equity back in the day -- those guys got crushed / although much crappier asset than CLO
quote:Curious if you are willing to share - in what capacity? Just a sell side desk on the street somewhere?
i sold some CDO equity back in the day
Posted on 10/26/23 at 3:27 pm to LSUtiger89
quote:Structured notes? Where are you buying them? Assume not FDIC insured.
Floating rate funds. It’s in bank loans usually. So the rates the banks can give on a money market (5%) is because they are receiving 7-10% on interest on loans. You can invest in those high interest loans during high interest rate environment times.
Posted on 10/26/23 at 3:35 pm to Big Scrub TX
quote:
I'm not sure exactly what you mean. It's all floating-rate, so where does your worry about rates come in? CLO equity in general is up pretty good since early 2022 when the rates hiked started. Compare that to almost any other fixed income over the same time period.
And what is your fear of inflation on the trade?
The leverage you refer to is inherent in the structure. But the only thing that actually matters is realized defaults - that is, payments not actually coming through. These things are absolutely spewing cash - as the underlying borrowers are all still paying (1% default rate at present). And even if the market hits distress, as long as the CLO is still in its investment period, that's usually GOOD news - as they can go buy loans at cents on the dollars. And to the extent those loans ultimately pay off in full, the CLO "builds par" - 100% of which flushes to the equity.
quote:
i sold some CDO equity back in the day -- those guys got crushed / although much crappier asset than CLO
Yeah, not even comparable, really. CLO tranche prices traded down HUGE in the GFC. But unlike mortgage ABS, almost all of it survived.
quote:
i sold some CDO equity back in the day
Curious if you are willing to share - in what capacity? Just a sell side desk on the street somewhere?
CLO by definition is a pool of managed B-BB highly levered companies, high interest rates impact them because by defintion they are already highly levered...Equity by defintion is the first loss tranche of all CLO funds typically they make up the first 5-9% of a deals losses and many have zero subordination
Back in 2005-2006 i sold several 100mm in CLO - no the product extremely well
i worked for a large money manager that had 2 CLO teams and an ABS CDO team -- sold products in the US and in the UK
Posted on 10/26/23 at 4:32 pm to hubreb
quote:This is true but not "the truth". Crucially, CLOs are the opposite of commercial banks (which borrow short and lend long) - they're liabilities are fixed for TWELVE YEARS (!!!) at extremely low prices (think SOFR +200BPS or something like that) - thus, they borrow long and lend short.
CLO by definition is a pool of managed B-BB highly levered companies, high interest rates impact them because by defintion they are already highly levered...Equity by defintion is the first loss tranche of all CLO funds typically they make up the first 5-9% of a deals losses and many have zero subordination
You can look at default/loss rates for the levered loan asset class over many decades and it's pretty compelling. The present set up is compelling also - 1% defaults, no maturities of note until 2025, $2 trillion of dry PE powder in case the companies need to be shored up, etc. To my knowledge, there has never been a vintage year CLO cohort where equity posted negative returns. It's true that equity is "first loss" - but then go back to my comments about borrowing long. Bad things happening is actually GOOD for CLO equity, as the manager gets to re-invest in a stressed/distressed market. And even in the worst of the worst years (2008/09) fully 15% of the entire loan market retired their loans...that is to say, a CLO would have had 15% completely fresh capital to go bargain hunting at a discount - with all capital gains accruing to the equity. etc.
Interest rates - at the short end of the curve which DIRECTLY impacts levered loan borrowers - have moved up 5% in less than 2 years. What impact have you noted?
Finally, manager selection matters. I'm not advocating buying the index in a passive CLO.
quote:Your company had 2 separate teams with their own CLO shelves? Do they still exist?
i worked for a large money manager that had 2 CLO teams and an ABS CDO team -- sold products in the US and in the UK
Posted on 10/26/23 at 4:51 pm to Big Scrub TX
quote:
Your company had 2 separate teams with their own CLO shelves? Do they still exist?
I know one ream still exist, our bank sold the money manager they operated out of. The other team was a group of guys that managed the levered loan book for the bank. They stayed at the bank but we got out of all non agency structured products in 2007. The abs cdo team quit in early 2007 right before the shite hit the fan, they created a group funded by Citi....luckily we were in early stages of creating a CDO squared deal and only ended up losing 60mm. That is why the bank got out of the biz.
I haven't followed CLO closely since then, know it performed well through the financial crisis. But also know you earning 20% comes with a reason. IRR on equity back then was 12%
Next week I'll do some duediligence on CLO spreads for you
This post was edited on 10/26/23 at 5:24 pm
Posted on 10/26/23 at 7:58 pm to hubreb
quote:
creating a CDO squared deal and only ended up losing 60mm.
Truly crazy how absurd things got back then. quote:Market seems insistent on pricing both equity and debt at crazy discount rates despite the durability of the product. The one name I'm thinking of that's yielding 20% now is because it's simply too cheap in the market. It went from trading at a pretty big premium to NAV to trading at a decent-sized discount. I'm accumulating down here.
But also know you earning 20% comes with a reason. IRR on equity back then was 12%
quote:Cool. What are you going to do? I like BBs also - they're yielding like 14% now. There's at least one public name that is all BBs.
Next week I'll do some duediligence on CLO spreads for you
For cash, I also like JAAA - Janus portfolio of AAA tranches. It's yielding north of 7% now I think.
Posted on 10/26/23 at 8:09 pm to Big Scrub TX
quote:
Bad things happening is actually GOOD for CLO equity, as the manager gets to re-invest in a stressed/distressed market. And even in the worst of the worst years (2008/09) fully 15% of the entire loan market retired their loans...that is to say, a CLO would have had 15% completely fresh capital to go bargain hunting at a discount - with all capital gains accruing to the equity. etc.
Posted on 10/27/23 at 8:02 am to Big Scrub TX
quote:
Cool. What are you going to do? I like BBs also - they're yielding like 14% now. There's at least one public name that is all BBs.
For cash, I also like JAAA - Janus portfolio of AAA tranches. It's yielding north of 7% now I think.
I had no idea these funds were available until I saw your post yesterday, looked at some of the funds you mentioned. For historical comparison I'll just pull deals for the prior few years. I'm only on bloom for a few hours this a.m. then heading to Oxford for the ball game this weekend
Posted on 10/30/23 at 8:37 am to hubreb
quote:
Cool. What are you going to do?
So i just pulled a large manager's deals randomly over the last few years - floating rate margins for AAA tranche...
9/19 - 116dm
9/21 - 114dm
4/22 - 143dm
10/22 - 215dm high
9/23 - 170dm
do well off the highs but also way wider than less stressful markets
for reference 5year IG CDS averaged mid 40s 2019 and 2021 excluding 2020 because of Covid...peaked in '22 at 111 and now at 80bps -- so CLO tracking IG closely although at wider levels given less liquidity - both still showing Stress
Posted on 10/30/23 at 10:33 am to lynxcat
I have some money invested in FRNs on treasury direct but most is in 4 week bills rolling over. stocks are about 30% of my invested funds right now but some stocks are starting to look like bargains
This post was edited on 10/30/23 at 10:37 am
Posted on 10/30/23 at 1:48 pm to hubreb
Thanks for pointing these funds out I had no clue they existed. Why would anybody choose the B to BBB tranches versus the AAA if the funds are yielding the virtually the same?
Posted on 10/30/23 at 2:19 pm to wutangfinancial
quote:They aren't. e.g. JAAA is yielding 6%+
Why would anybody choose the B to BBB tranches versus the AAA if the funds are yielding the virtually the same?
EIC (portfolio, I believe, of almost exclusive BBs) is yielding 15%ish.
This post was edited on 10/30/23 at 7:08 pm
Posted on 10/30/23 at 2:42 pm to Big Scrub TX
Coupons and ratings on a recent CLO deal - not one of the funds
7.070 Aaa
7.670 AA
8.070 A
9.620 BBB-
12.520 BB-
7.070 Aaa
7.670 AA
8.070 A
9.620 BBB-
12.520 BB-
Posted on 10/30/23 at 2:44 pm to hubreb
quote:Those BBs have come in a bit. They were nearer to 14% last time I looked. They can be extremely volatile, but you WILL get all your money.
7.070 Aaa
7.670 AA
8.070 A
9.620 BBB-
12.520 BB-
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