BARRY JULIEN | FEBRUARY 14, 2022
Transcript
BARRY JULIEN: Hello, I’m Barry Julien, Chief Investment Officer at Oakhurst Capital Management.
With a great deal of recent changes in the bond market, we thought it timely to provide a market update and mention some interesting opportunities that we are finding for our clients.
This morning inflation surprised on the upside, with 0.6% readings for both core and headline CPI in January, bringing the year-over-year figure to 7.5% and 6%, respectively. These figures represent a 40 year high.
We believe supply chain disruptions will moderate throughout the year, but wage gains and housing impact will continue to keep inflation well above Fed’s target.
This inflation report sparked another sell off in Treasuries, with yields of the 10-year treasury topping 2% and the two-year Treasury moving up above 1.5% as the probability of 50 basis point tightening in March increases.
The continued increase in inflation forced the Fed to abandon its prior transitory narrative and the markets have now adjusted to the Fed’s more hawkish tone and the yield curve has flattened and risk assets have sold off. In fixed income, corporate bond spreads have moved wider with both investment grade and high yield sectors experiencing some outflows.
Fortunately, the credit backdrop remains quite healthy as corporate balance sheets are strong, capital markets are wide open, and financing costs are historically low.
Hopefully, credit fundamentals will enable credit rating upgrades to comfortably outweigh downgrades over the upcoming year.
During these market adjustments, opportunities often arise. We’re seeing much improved yields in many sectors. One area in particular that we like are busted convertible bonds.
They’ve become quite attractive as the underlying stock prices have fallen, which has pushed down the prices of the convertible bonds. Thus with deeply discounted bond prices and yields that are often well above those of more traditional debt offerings, we believe these represent very good value.
Should the underlying equity prices rebound, there will be significant upside to the already attractive yields and total returns will be quite impressive.
In addition, the ability to buy high quality investment grade bonds at 3.5% to 4% represents a meaningful improvement over the many months when attaining a 2% yield proved challenging. In high yield, a diversified portfolio cannot be constructed with yields approaching 6%.
We thank you for your time today. If you would like more information about us or wish to discuss various strategies that may fit your needs, please visit us at www.oakhurstcap.com. We look forward to hearing from you.
Disclosures
The information contained in this post is general in nature and for informational purposes only. It should not be considered as investment advice or as a recommendation of any particular strategy or investment product. This post is not a solicitation or an offer to buy or sell any specific security. Oakhurst Capital Management cannot guarantee the accuracy of information from third parties.
