"High Yield Index Years to Maturity suggests organizations find refinancing or reissuing debt difficult, primarily due to the high costs associated with the risk-free component." As per this paper analyzed by Joachim Klement the biggest impact is on R&D: https://klementoninvesting.substack.com/p/rate-hikes-and-the-damage-to-our
"They found that a 100bps increase in Fed Funds Rates reduced R&D spending by about 1-3% in the following one to three years. Venture Capital, which relies much more on debt capital than established businesses saw its spending decline by 25%."
Hey, Giovanni! Just replied to your email as well. Thank you!
Michael Green pointed the index out to me during a prep call for the session I hosted in New York last year (https://youtu.be/wHwAiVB_tBI?si=HfrZeMLvVzL6EQtJ). He said the following (which I paraphrase): The weighted average maturity for the high-yield index reveals a historical pattern observed during the global financial crisis. During that crisis, the drop in the index indicated a lack of capacity for refinancing due to heightened uncertainty in the credit markets. The current situation is related to challenges in refinancing due to the inability to afford the risk-free component. Despite the differences, the implications are similar. Many companies will face bankruptcy when forced to address refinancing dynamics, particularly smaller companies with high exposure to financing needs. This trend is likely to extend to larger companies in the future.
"High Yield Index Years to Maturity suggests organizations find refinancing or reissuing debt difficult, primarily due to the high costs associated with the risk-free component." As per this paper analyzed by Joachim Klement the biggest impact is on R&D: https://klementoninvesting.substack.com/p/rate-hikes-and-the-damage-to-our
"They found that a 100bps increase in Fed Funds Rates reduced R&D spending by about 1-3% in the following one to three years. Venture Capital, which relies much more on debt capital than established businesses saw its spending decline by 25%."
Thank you very much for the trade-ideas
Hey, Giovanni! Just replied to your email as well. Thank you!
Michael Green pointed the index out to me during a prep call for the session I hosted in New York last year (https://youtu.be/wHwAiVB_tBI?si=HfrZeMLvVzL6EQtJ). He said the following (which I paraphrase): The weighted average maturity for the high-yield index reveals a historical pattern observed during the global financial crisis. During that crisis, the drop in the index indicated a lack of capacity for refinancing due to heightened uncertainty in the credit markets. The current situation is related to challenges in refinancing due to the inability to afford the risk-free component. Despite the differences, the implications are similar. Many companies will face bankruptcy when forced to address refinancing dynamics, particularly smaller companies with high exposure to financing needs. This trend is likely to extend to larger companies in the future.
Added a bit more context regarding the trade idea in the 29 January, 2024 letter (https://physikinvest.substack.com/p/turning-nickels-into-dollars-a-winning).
Have a great week ahead!
One of the research points that I will share with you shortly deals precisely with the U.S. High Yield Index Option-Adjusted Spread...
Looking forward to it!