Portfolio Strategy

December 3, 2021

The Long and Short

Back-up in credit spreads carries over into December

Dan Bruzzo, CFA | December 3, 2021

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 investment grade corporate bond index widened by 6 bp in November, resulting in a negative excess return of -0.53%. Total return remained relatively flat increasing just 0.06% as Treasuries rallied in response to the risk-off market posture. The most recent move brings the year-to-date spread performance to -28 bp of implied net OAS tightening for 2021, which translates to a positive 2.26% credit return and -0.96% of total return. The IG Index itself meanwhile is trading wide of where it started the year as we enter December.

Our sector weighting view recommendations remain unchanged for December. The two graphics below provide a summary of 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 December 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

Financial sectors were among the most resistant to the November sell-off in credit as top performances were provided by REITs (-0.19% excess return), brokers/asset managers (-0.22%), banking (-0.24%), and finance companies—due in large part to the aggregate tightening provided by the finalization of the long-anticipated General Electric (GE: Baa1/BBB+*-/BBB) tender offer. The legacy GE  bonds that qualify for the finance companies segment were tendered for at premium levels at the close of the month, contributing to the segment’s performance. Consumer-cyclical (-0.37%) rounded out the top 5 performances by sector. Energy (-1.08%) provided the single worst performance in the IG Index as oil fell drastically in the closing sessions of November. The remainder of the bottom 5 performances were logged by transportation (-0.84%), communications (-0.79%), consumer non-cyclical (-0.65%), and utilities (-0.62%).

New issue volume for the IG corporate bond market modestly exceeded expectations at $112.5 billion in November and continued to outpace the prior year period for the second consecutive month. Jumbo deals from Baxter (BAX: Baa1*-/A-*-/A-*-), HSBC Holdings (HSBC: A3/A-/A+), Westpac (WSTP: Aa3/AA-), and Canadian Pacific (CP: Baa2/BBB+) contributed to the overall active tone from issuers throughout the month. The market is estimating another $55 billion in supply for December, which is keeping volume on pace to reach $1.5 trillion by year-end. The high yield market provided an additional $36.3 billion in November, just modestly edging out the prior year period.

Exhibit 3. Supply Recap

Source: Bloomberg LP

Exhibit 4. Weakness in energy, communications and transportation amidst the abrupt back-up in spreads

Source: Bloomberg Barclays US Corp Index

Exhibit 5. Flight-to-quality apparent late in the month

Source: Bloomberg Barclays US Corp Index

Exhibit 6. Long paper underperforms amidst risk-off market posture

Source: Bloomberg Barclays US Corp Index

Exhibit 7. Mixed bag among the top performers, while airlines and energy prominent among the worst performing credits

Source: Bloomberg Barclays US Corp Index

Year-to-Date Index Performances

Exhibit 8. Energy and Finance Cos have remained the prevailing credit trades YTD, while tech and banking underperform

Source: Bloomberg Barclays US Corp Index

Exhibit 9. Investors have sought higher-yielding, lower-rated credits YTD even as more recent preference has been for more stable credit quality

Source: Bloomberg Barclays US Corp Index

Exhibit 10. Long paper has held up as the preferred strategy YTD

Source: Bloomberg Barclays US Corp Index

Exhibit 11. Airline credits and BDCs remain among the top credit trades of 2021

Source: Bloomberg Barclays US Corp Index

Dan Bruzzo, CFA
1 (646) 776-7749
dbruzzo@apsec.com

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of Amherst Pierpont’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, Amherst Pierpont may act as a market maker or principal dealer, and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

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