Garcia Hamilton & Associates: Why We Have Lowest Credit Exposure in 40 Years

Narrow Corporate Bond Spreads

• 🎯 Corporate bond spreads are currently at or near their narrowest levels ever, according to Gilbert Garcia.
• 📉 This has led Garcia Hamilton & Associates to significantly reduce their credit exposure.

Reduced Credit Exposure

• 📊 The firm's portfolio has less than 10% in corporate bonds, specifically around 5%, compared to a market weight of approximately 25%.
• ⚠️ This cautious stance is driven by the extremely narrow spreads, which historically suggest limited upside and potential for wider spreads.

Investment Grade vs. High Yield

• 🏦 Garcia confirms their 5% exposure is within investment grade bonds.
• 📈 The high yield market is also experiencing similarly tight spreads, with averages about 100 basis points wider than the current roughly 280 basis points.
• 🌐 This tightness extends across various fixed income markets, including CMBS and others.

Supply and Demand Dynamics

• 📈 Despite a robust supply of corporate bonds issued in the first half of the year, spreads remain tight.
• 🚫 The current market strategy of buying credit and hoping for the best is deemed not a good strategy historically.

Future Outlook and Strategy

• 🔑 Garcia suggests that credit will become more attractive when spreads widen to historical averages, around 125 to 150 basis points over treasuries.
• ⏳ They are currently trading credit risk for mortgage-backed security prepayment risk while waiting for more favorable opportunities in the credit market.