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Breaking down what's driving market optimism

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Head of Origination & Capital Markets at Churchill Asset Management Randy Schwimmer joined Yahoo Finance Live to break down what's driving market optimism as Americans await COVID-19 relief.

Video Transcript

SEANA SMITH: For more on this, we want to bring in Randy Schwemmer. He's the head of origination and capital markets at Churchill Asset Management. And Randy, let's just start with the gains that we're seeing today, and really, the rally that we've seen over the past couple of trading days. What's driving the investor optimism at this point?

RANDY SCHWIMMER: And Seana, you could actually go back a number of weeks, right, to the beginning of the year. Once it became clear that the vaccines were going to be rolled out, that the economic environment was going to settle down, particularly in the second half, the markets were anticipating. They're basically looking ahead six months through this kind of rough patch that we're going through from an infection rate perspective, as you've seen across the country, and thinking about, OK, what's going to happen once the vaccines are rolled out, once we return to normality, and once some of the more cyclical businesses settle down.

But certainly with the sectors that we invest in from a credit perspective-- and these are the more defensive sectors such as healthcare, technology, business services, and so forth-- those businesses have actually motored pretty well through the last 12 months. And I think investors are looking at some of the opportunities with sectors that will continue to do well through this period, and they're pretty bullish at the outlook.

ADAM SHAPIRO: In fact, you talk about $4 billion of inflow into retail loan funds. And I know as a professional that you have the best interest not only of your clients, but of your firm at hand. But I would imagine there are a lot of investors who may not realize some of the funds to which they're putting money. Might be lending to companies which are able to hide pretty bad balance sheets when interest rates are this low. Is that a concern?

RANDY SCHWIMMER: Well, the $4 billion that you reference is the money that's going into loan funds, and I think in large part because people view that interest rates are probably going to go up. Loan funds are floating rate funds. Our capital-- being a direct lender, we have about $30 billion of capital available-- is really locked in money. So it doesn't move in and out depending on the whims of headlines.

And investors in private credit are looking really for longer term, more stable returns. And they're looking at managers like Churchill and saying, we want to be with managers who are going through various cycles for the long run. And what they like about what they're seeing with us, for example, is that the industries that we are investing in, the defensive industries, knowing we were going to go into a cycle at some point. It turned out to be the exact industries that are less COVID sensitive than some of the other businesses, such as energy, real estate, more high end consumer that have been hurt.

So what investors are really looking for is consistency, and they're looking for protection from those cyclicals when you get into a downswing, depending on what that downswing trigger is-- it turned out to be biological. But even if it tends to be financial, those are the things that the better, more experienced managers want to guard against.

SEANA SMITH: Hey Randy, I want to ask you more about what we're seeing in the bond market right now because we've seen this bump up in yields, a 10-year yield, what, at its highest level in 11 months. At what level do you think it becomes a headwind for the markets? And I guess, what's your view just on what we're seeing going on in the bond market at this point?

RANDY SCHWIMMER: So you can go back to that. Actually, last year, we saw in the high yield market, the high yield bonds had the best year ever in 2020. Think about that. In a pandemic year, one of the highest risk asset classes in credit had the best year ever. Why? Because the Fed signaled early on that they were going to support that asset class, and in fact, actually invested in some of the bonds, for example, in cruise lines and airlines.

I think you're seeing now some concern that rates are going to be headed up because if the economy strengthens, you're going from essentially zero rates to what looks like higher rates. But the Fed has said basically they're not going to move for another couple of years.

So I think this is probably some anticipation of potential inflation if you get, let's say, pent-up consumerism in the second half of the year. And so, I think there may be some concern about that. But it's probably more of a medium to long-term risk. And I think certainly our Nuveen economic colleagues, who know more than I do about that, seem to agree with me.