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Remain defensive amid volatility swings
admin | April 3, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Recently updated recommendations incorporate a more defensive posture, reflecting concerns that the global economic fallout of COVID-19 outbreak will continue well into the second half of 2020, with limited prospect for relief in near-term volatility. The compounded stress on energy/commodity markets is making it extremely difficult to time fluctuations in valuation among commodity credits, which further supports a call to overweight more defensive segments within the Index. The long-term valuation proposition in higher rated, less cyclical credits is compelling enough to forego more aggressive strategies that are susceptible to day-to-day swings in volatility.
Exhibit 1. Sector Recommendations for April 2020
Note: Recommendations summarize how APS expects sectors within the IG Index to perform for the next several months, on an Excess Return basis (total return net of commensurate UST return). These weightings serve as a proxy for how portfolio managers should position their holdings relative to the broad IG corporate bond market. Source: Bloomberg/Barclays US Corp Index, Amherst Pierpont Securities
The Index’s third straight month of negative excess returns developed into one of the worst sell-offs in history (-10.7% excess return), as IG spreads (aggregate OAS) widened +136 bp in March. Spreads have now widened by -170 bp year-to-date, resulting in negative Index Excess Return of -13.4%. Comparable Treasuries rallied by just under +10%, resulting in a Total Return of -3.6% for IG Corps in 2020.
There have been few surprises among the hardest hit sectors within the Index, which include Energy & Basic Materials, as well as Finance Companies – which have the double whammy of Aircraft Lessors, as well as the recent slate of higher risk, Business Development Companies (FSK, ARCC, etc) that operate as middle market lenders. Banking (-7.11%), Technology (-9.21%) and Consumer Non-Cyclical (-11.51%) provided the most insulation to the pervasive sell-off throughout the month. All three sectors were recently moved to an overweight in a defensive reshuffle of recommendations: APS Strategy – Adopt Defensive Posture (Banks, Tech).
IG Corporate supply delivered a massive +120% gain over prior year volumes, as issuers pounded the calendar late month. Issuance was first exclusive to high quality and bellwether names, but eventually the floodgates opened with gaudy concessions enabling increasingly riskier issuers to tap the market over the last several sessions of the month. The big numbers in IG helped offset the almost total shutdown of the HY markets. Issuance totals for March were aided by the sizable $20 billion Oracle deal that priced the last week of March, and active block size issuance from the money center banks during the month. For additional color on the state of the new issue market for IG Corporates please see: APS Strategy – IG New Issue Market.
Source: Bloomberg/Barclays US Corp Index, Amherst Pierpont Securities
IG Corporate Bond Index year-to-date return attribution summary
Source: Bloomberg/Barclays US Corp Index, Amherst Pierpont Securities
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