The Long and Short
June 2021 return attribution summary
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.
The Bloomberg Barclays investment grade corporate bond index tightened by 7 bp to +81 – retesting historic, pre-crisis tights for the broad index and some of the tightest levels in history for BBB credit. The move generated 0.56% excess return to investors on top of the 1.07% caused by the rally in Treasuries, for a total return of 1.63%. So far, spreads continue to hold in amidst the sharp move lower in rates but are pushing off historic tights in the early sessions of July.
We have no changes to our sector weighting views this month. Our current positions reflect our expectations for a more rapid global economic recovery throughout 2021 than the market is currently anticipating. Exhibits 1 and 2 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 we recommend that portfolio managers should position their holdings relative to the broad IG corporate bond market.
Exhibit 1 and 2. APS Sector Recommendations for July 2021
Source: Amherst Pierpont, Bloomberg/Barclays US Corp Index
Color = recommendation: Green – Overweight, Red – Underweight, Yellow – Marketweight
Size = Market Value within the IG Index
Source: Amherst Pierpont, Bloomberg/Barclays US Corp Index
Communications (+0.95% excess return) provided the top performance by sector in June, exemplifying collective investor demand for long-dated BBB paper. The rest of the top-5 included finance companies (0.76%), technology (0.72%), REITs (0.69%) and energy (0.68%) – many of which have remained prominent trends throughout much of 2021 and all of which provided various avenues for corporate investors to gain exposure to BBB credit in June. The bottom-5 performing sectors included banking (0.33%), utilities (0.36%), broker/asset managers (0.38%), natural gas (0.39%) and insurance (0.50%) despite investor appetite for duration. With IG spreads, and particularly BBB spreads, at or near historic tights the glide path for risk-on strategies may be shortening, but for now investor appetite for yield continues to dictate performance within the index.
IG corporate bond new issue volume exceeded expectations in June at $139 billion, despite a -25% drop year-over-year versus June 2020. Monthly totals were aided by a last-minute push provided by large-scale, multi-tranche USD deals from Qatar Petroleum ($8.5 billion) and salesforce.com ($7 billion) on the last two days of the month. High yield volume ($42 billion) also failed to outpace the volume in the prior year month for the first time in 2021. Demand for paper remains robust as we head into the typical seasonal slowdown in monthly issuance for July and August.
Exhibit 3. Supply Recap – IG issuers exceed June expectations but once again fall short of prior year
Source: Bloomberg LP
Exhibit 4. Demand for long-dated BBB paper propels the Communications segment
Source: Bloomberg Barclays US Corp Index
Exhibit 5. Risk-on trade evident in June with BBBs outperforming again
Source: Bloomberg Barclays US Corp Index
Exhibit 6. Long-dated spread return outperformed even as treasuries rallied
Source: Bloomberg Barclays US Corp Index
Exhibit 7. Airlines return to the top of the list in June after a brief pause in May, while healthcare facilities were prominently among bottom performers
Source: Bloomberg Barclays US Corp Index
Exhibit 8. Energy and Finance Cos have remained the prominent trades YTD
Source: Bloomberg Barclays US Corp Index
Exhibit 9. Investors still seeking higher yielding, lower rated credits YTD
Source: Bloomberg Barclays US Corp Index
Exhibit 10. Corporate investors still targeting long-end of the curve even as 10- and 30-year treasuries have been gradually recovering since March peaks
Source: Bloomberg Barclays US Corp Index
Exhibit 11. Airline credits and BDCs remain the top trades of 2021
Source: Bloomberg Barclays US Corp Index
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