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As inflation continues to outstay its welcome in the global economy, we have previously discussed the impact of rising input costs on corporates and how crucial pricing power can be in such a challenging environment.

The vast majority of the high yield universe used the attractive funding conditions last year to term out their maturity profiles. In fact, 2022 maturities in both US and European high yield equate to just 1% of their respective indices.

The broad-based sell-off that has faced investors since the start of this year has been all the more painful because of the breakdown in traditional correlations, which has put conventional hiding places out of reach.

At the beginning of this year you would have struggled to find a single investment bank or asset manager (ourselves included) that thought owning 10-year US Treasuries (USTs) was a good idea.

Earnings season is now in full swing, and it has undoubtedly been eventful. During the first quarter, companies have had to navigate multiple obstacles, including surging commodity prices, hawkish central bank policies, a Russian invasion, further supply chain disruptions caused by lockdowns in China, and dwindling consumer confidence.

Since the end of last year, central bank officials have been falling over themselves to increase their hawkishness around rates, particularly in the US. Even the ECB Governing Council members have been vocal of late.

Collateralised Loan Obligations, or CLOs, are bond instruments issued to fund a specific pool of loans, typically senior secured or ‘leveraged’ loans, to companies.

One of the best ways to insulate against rising rates is to take zero interest rate exposure and invest in floating rate securities. European ABS is all floating rate, with no duration, so prices do not move up or down when rates move and with higher rates come higher coupons.

CRE ABS offers conservatively structured debt features, with generally short duration exposure and a spread premium rewarding the more intensive underwriting and due diligence required.