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Return attribution summary for July 2020
admin | August 7, 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.
For another consecutive month, investment grade corporate bond investors targeted more risk and favored higher beta credits, but appeared to be bit more selective about which sectors they took on more credit and duration risk than in previous months. The IG Index tightened -20 bp in aggregate to +130 bp at month-end, trimming the year-to-date spread sell-off to a +43 bp move since the start of the year. July excess return was +1.70% with a total return of +3.25%, and 2020 returns stand at -3.08% and +8.44%, respectively.
After leading the Index for two consecutive months, Energy (+2.07% excess return) fell out of the Top 5, as the recovery in oil prices stalled out in July, leading to more mid-tier performance in credit. Utilities were a favored strategy for July, with Electric (+2.49%) and Natural Gas (+2.93%) among the leading performers in the Index. Rounding out the top 5 were Basic Industry (+2.53%)—led by chemicals and precious metals credits—as well as Transportation (+2.52%) and Insurance (+2.43%), with investors seeking out long duration plays in credit. The 30-year US Treasury rallied to +1.20% at month end from over 1.40% at the prior month close. On the other side of the coin, Banking (1.05%) registered the single weakest return in July as the Treasury curve collapsed and projected interest margins compressed. Also falling out of favor from the prior month were Finance Companies (+1.11%) as the GE recovery story stalled on weak earnings and outlook in their 2Q20 results. Other bottom performers included Technology (+1.36%), Capital Goods (+1.61%)—due in large part to incredibly weak performance and disappointing outlook at Boeing—and Communications (+1.61%).
For the first month since February, IG corporate bond new issue failed to outpace volume for the prior year, posting a -30% drop year-over-year to $71.4 billion. High Yield volume also dropped by -12%. Issuance fell well short of expectations, even with muted estimates ($90-100 billion) coming into the seasonally weak month of July. The market is expecting comparable volume in the $50-60 billion range for the also light month of August, ahead of the seasonal deluge in September.
Sector recommendations remain unchanged
Investors should remain in a more defensive posture, based on concerns about the longer-term global economic fallout of COVID-19 outbreak and related earnings volatility, with the prospect for recurring spikes in volatility for the near-to-intermediate term. 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 overweighting more defensive segments within the Index. With the re-pricing of credit risk year-to-date, the long-term valuation proposition in higher-rated, less-cyclical credits is compelling enough to forego more aggressive strategies that remain susceptible to shorter-term swings in volatility.
Exhibit 1. APS Sector Recommendations for August 2020
Note: The table summarizes 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 Corporate Index, Amherst Pierpont Securities
Source: Bloomberg/Barclays Corporate Index, Amherst Pierpont Securities
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