The extraordinary market volatility of the first quarter did not develop into a full-scale retreat, although it did convince the U.S. Federal Reserve to delay further policy normalization until later this year. Key economic metrics for the Fed, such as wage growth and employment, continue to improve at a slow but steady pace. Transient factors such as China and the decline in oil prices have, as expected, stabilized. However, crosscurrents abound; a return to risk assets has collided with weak GDP expectations, an earnings recession and renewed downward pressure on benchmark U.S. yields.
The Fed’s timing recalibration notwithstanding, another fifty basis points of tightening remain likely this year despite rampant quantitative easing and negative interest rates in the rest of the developed world, which may keep interest in U.S. Treasury debt high. Demand for yield, and the relative unavailability of it, will remain a characteristic of the financial markets, as will the continued disintermediation of traditional lending institutions from the credit arena. However, corporate margins continue to be squeezed, which highlights the advantages of asset-backed transactions versus cash flow deals. With both equity and traded credit markets tactically overbought and the macro overlay still opaque, the uncorrelated, risk-adjusted returns available from Old Hill Partners’ asset-backed lending activities should remain an attractive alternative for institutional investors, high-net-worth individuals and any others seeking cash-paying yield.
For a full version of Old Hill Partners’ Quarterly Review, please email Chelsea Graves at firstname.lastname@example.org.