Fixed Income Q3 2023

After a strong sell-off in 2022, bonds now offer much higher returns.  We see limited downside risk in short- and intermediate-term bonds, as the bias towards rates is now to the downside. In fact, if rates fall next year, bond prices would likely improve.  The yield on cash is close to 5%, which is the highest it has been in a very long time.  Because the market expects interest rates to fall, the yield curve remains inverted, meaning long-term rates are below short-term rates. In this environment, we are actively moving money out of cash and into bonds or bond funds with defined maturity dates to lock in reasonably attractive yields without having to take on much maturity or interest rate risk.  Bonds maturing within the next five years or fewer appear to be the sweet spot for us. While most corporate borrowers have taken advantage of low rates to refinance high-cost debt, some may still need to refinance portions of their debt in the next few years. This refinancing effort might be either a challenge or an opportunity, depending on the circumstances. In that vein, we are taking a closer look at the debt-related metrics of our portfolio companies.