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
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
Exhibit 4. Weakness in energy, communications and transportation amidst the abrupt back-up in spreads
Exhibit 5. Flight-to-quality apparent late in the month
Exhibit 6. Long paper underperforms amidst risk-off market posture
Exhibit 7. Mixed bag among the top performers, while airlines and energy prominent among the worst performing credits
Year-to-Date Index Performances
Exhibit 8. Energy and Finance Cos have remained the prevailing credit trades YTD, while tech and banking underperform
Exhibit 9. Investors have sought higher-yielding, lower-rated credits YTD even as more recent preference has been for more stable credit quality
Exhibit 10. Long paper has held up as the preferred strategy YTD
Exhibit 11. Airline credits and BDCs remain among the top credit trades of 2021
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