Don't take interest rate risk: Okada

As Treasury yields rise to a 10-month high Monday, Sycamore Tree Capital Partners CEO Mark Okada tells Reuters' Fred Katayama investors should take on credit risk instead of rate risk and consider putting money in bank loans and collateralized loan obligations.

Video Transcript

FRED KATAYAMA: Investors taking profits Monday as the main indexes retreat from the record highs. Well, let's get some tips on managing risks and investing in the credit markets. We're joined from Dallas, Texas by Mark Okada. He is CEO of Sycamore Tree Capital Partners. And good afternoon. Welcome, Mark.

MARK OKADA: Hello, Fred. Good to see you.

FRED KATAYAMA: Good day. Good to have you with us, Mark. I'm doing fine. The Washington, you know, basically was shrugged off by Wall Street last week amid the Capitol riots. And Wall Street just went on to record highs. Now that the Democrats have actually begun their push to oust Trump, what risks do political actions in Washington pose for investors on Wall Street?

MARK OKADA: Your question about being a risk manager, I think, it's the right one, because that's really what we do, right? I mean, everyone that's going to see pipeline is advising some capital. And if you have a risk lens, I think that's the right lens as opposed to an opportunity lens.

And so when we think about what's happening across that, some of these market moves don't make a whole lot of sense, unless you think that maybe there's been some sort of policy mismatch across markets. I kind of-- I mean, that that viewpoint that this was a health crisis and not a financial crisis that the Fed and fiscal policy response has been more to a financial crisis.

And so we've seen markets zoom back to places that are really kind of not understandable. And now we're facing a time where there's kind of a reckoning of that situation. And there's good news and bad news. And I think a lot of this movement in the market has created some awareness of the risks that we're all trying to handicap.

FRED KATAYAMA: And markets-- the market's not far from record territory. The S&P technically is an overbought territory. Do you sense that we're on the cusp of a correction? Or is it still onwards and upwards a new administration and vaccine rollouts and all's fine from here?

MARK OKADA: Well, I think we have to kind of have different views on the economy versus markets. We've only seen two times when we've had a 60-plus percent bounce that was 82 in 2009 and then this last period to today. And the next six months-- nine months after that, we're not so good.

So I think looking forward from here, yeah, we've got the blue wave. Yeah, we'll have some pretty big stimulus. But we're going to face higher interest rates. We're going to face some higher taxes and higher regulations. And I think those-- that kind of cocktail of opposing forces I think are going to make markets more challenged.

But I think the economy from here continues to get better. I am very pleased to see how-- you know, we've got a vaccine. We've got a reopening in this health crisis that I had mentioned. You know, our perspective on what this is it's hopefully going to fade at some point and wish to get back to business as usual.

FRED KATAYAMA: And that's want to ask you about. Interest rates are rising, as you pointed out. We've got the-- the 10-year creeping up past 1.1%. 10-month highs now for traditional 60-40 portfolio. Investors thinking, what do I do on the fixed income side when you got treasuries? How much farther can we go? What would you suggest? Where should they put their investments in credit right now?

MARK OKADA: Well, we are seeing a lot of professional investors. Large pension funds endowments move into our area which is alternative credit. I've been very, very involved in really establishing the bank loan market and the securitization part of that called the cloud on obligation market or CLO market. And that was kind of my claim to fame early on. And those markets are less touched by the Fed.

The Fed is implying bank loans is not buying CLOs. These are floating rate markets. And so we're taking credit risk. We're taking volatility risk, but we're not taking interest rate risk, which I think is a very important point.

I think the thing that I would tell investors to think about, as they think about their fixed income allocation, is take credit risk right now, not interest rate risk because they kind of reflated everything. And now, we're very sensitive to rate risk.

But as the economy gets better, credit, especially go investment grade, can be the classic value trade. You're handicapping whether companies can pay back their debt. And as the economy gets better, as we have this reopening and stimulus, even though rates may rise, you're confined some very nice recovery trades and good returns there.

And so I think I would tell them, focus a little bit more on credit risk. It will go down in that credit quality spectrum but don't take interest rate risk. And that's really the-- that's going to hurt you.

FRED KATAYAMA: Don't have to go for investment grade. Maybe go for a little bit more risk on that towards high yield. And what instruments in particular?

MARK OKADA: Yeah, well, it is a difficult call I think for the general investor, because markets have replayed it so hard. I mean, everything is priced to perfection including high yield, including a lot of the markets that we-- we trade in for as an example.

I mean, we're-- our team here is looking at the fundamentals across about $2 trillion worth of loan to bonds. And out of that whole universe, we see a little less than 10% of it as attractive to us.

Now, we have 30 years of experience, and we have a very deep team. And we can parse through 1,200 different issuers and 10 times that out of the number of securities that we look at. But, you know, and you go through that. There's some very, very attractive returns. But for the general investor, you know, they're not going to be able to do that, quite frankly.

So it's a time of caution. But I would look for ways to get out of very high grade exposure that's going to have that-- that sort of interest duration sensitivity and look for other areas of the market that may be floating rate, that may be below investment grade such as the bank loan market and the CLO market.

FRED KATAYAMA: OK, CLO's bank loans-- take a look at that. Thanks a lot, Mark, for your tips.

MARK OKADA: Sure.

FRED KATAYAMA: Our thanks to Mark Okada of Sycamore Tree Capital Partners in Dallas. I'm Fred Katayama in New York. This is Reuters.