Inflection Point

News reached us last week of a daring nighttime escape from the National Aquarium of New Zealand. An octopus named Inky sneaked out of a small hole in his tank, across the floor, and down a 164-foot drain pipe into Hawke’s Bay. “Didn’t even leave us a message,” said the aquarium manager, Rob Yarrall.

What caught our attention was that Inky’s tankmate, Blotchy, chose to stay behind. While some quickly tagged Blotchy as a bit of a chicken, our experience of investor behavior points us to a different conclusion. Blotchy assessed the risks, saw there would be real upside in now having the entire tank to himself, and wished Inky luck.

Similar decisions are facing accounts in the institutional loan market. As we’ve covered extensively in this space, credit buyers are fleeing the confines of this zero-yield environment into higher return assets. While this also entails more risk, experienced managers are encouraged by bullish economic news and improved public markets.

This is constructive for liquid credit. “Grinding higher” is how one analyst described activity in the secondary loan market (see our Chart of the Week). Loan prices are slowly, steadily marching upwards, as values of tradeable leveraged loans improve.