Analyzing The Middle Market Debt

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Leveraged credit suffered from heightened volatility over the third quarter as mutual fund investors withdrew from the sector amid concerns about frothy valuations and talk of a credit bubble. We believe the high-yield bond market correction this quarter is healthy and overdue, but investors can expect choppier waters ahead. One segment we believe may help limit near-term volatility risk while capturing strong returns is middlemarket debt. One way that we identify middle-market debt is based on deal size of up to $750 million, and we specifically find value in those between $300 million and $750 million, which we classify as “upper middle-market.” As a whole, middle-market debt historically had many attractive features relative to larger…show more content…
As if reacting to the tolling bells, high-yield markets sold off in July, leading to volatility that would spread across risk assets throughout the quarter. High-yield corporate bonds posted a loss of 1.3 percent in July, the first monthly loss in 10 months, with spreads widening by 13 percent. Equities followed, with the S&P 500 dropping 4 percent between July 24 and Aug. 7, climbing to record levels in August, and falling again in September. As the quarter ended, the risk-off sentiment that overtook markets was clear as defensive sectors, mainly consumer staples and healthcare, outperformed more cyclical sectors such as consumer discretionary and energy.
Our outlook for the U.S. economy remains positive. Despite weakness in
September, strong U.S. economic data justified the rebound to the S&P 500’s highs in August. Second-quarter gross domestic product was revised upward to
4.2 percent, led by business investment. Durable goods orders surged over the summer to set the largest one-month gain on record while consumer confidence continued to hit multi-year highs. With tailwinds for economic growth gathering, we could see a strong third-quarter GDP reading of approximately 3.2 percent.
While the U.S. economy is set to move full steam ahead, international economic data remain weak. Euro zone economic confidence is falling as the entire region continues to battle below-target inflation. At the start of September, the European
Central Bank cut interest
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