The U.K.’s unexpected decision to exit the European Union caused no shortage of volatility since our last update, but ultimately was not a catalyst for an immediate change in trend. On the contrary, the wild whipsaws in equity and bond markets exposed structural deficiencies that have quietly accumulated since the financial crisis, and the continued decline of high-grade bond yields displays a continued concern for safe and/or stable alternatives to place capital.
Meanwhile, although Brexit has clearly delayed the U.S. Federal Reserve’s rate-normalization timetable, it has not derailed it - despite the presidential election in November, we continue to feel hikes of 25-50 basis points by that point are possible. Demand for yield in any form has only risen since our last update, while the demand for perceived safe havens has pushed large portions of the sovereign debt universe to negative yield - an unnatural situation unrivaled in modern financial history and one certain to end badly for investors caught holding the bag when the inevitable “Great Unwinding” begins.
The situation, which will be greatly exacerbated by a colossal decline in the liquidity of some traded credit markets, is accentuating the return enhancement possible through prudently-structured, asset-backed private debt transactions such as those offered by Old Hill Partners. Especially in light of the associated illiquidity premium they carry, such transactions continue to offer an uncorrelated alternative to institutional investors seeking risk-adjusted cash yields.