Uncategorized
IG index performance and outlook
admin | September 6, 2019
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. This material does not constitute research.
Below is a summary of how the sectors within the investment grade (IG) index are expected to perform for the next several months, on an excess return basis (total return net of commensurate US Treasury return). These serve as a proxy for how portfolio managers should position their holdings relative to the broad IG corporate bond market. Better performance is anticipated from lower-rated segments with greater risk compensation (OAS), as global investors will continue to move out the credit spectrum in the search for higher yields in US dollar spread product.
Exhibit 1. Sector recommendations for remainder of 2019
Source: Bloomberg Barclays US corporate index, Amherst Pierpont Securities
The month of August started with a rapid back-up in credit, as Treasuries rallied and the stock market faltered amidst trade war drama and increased calls for a recession on the near-term horizon. Corporate spreads eventually recovered some, but the IG corporate bond index closed the month with OAS net +12 bp wider, generating a negative -1.13% excess return for August (and +3.14% total return with the rally in UST). Financials led the overall performance for the month, with REITs (-0.30% excess return), banks (-0.44%) and broker/asset managers (-0.55%) all finishing in the top 5, proving most resistant to the early sell-off in credit. Tech (-0.91%) also rounded out the top performers, bolstered by strength in semiconductors and communications equipment, and individual gains in unique credit situations, such as VRSK and MRVL. The energy trade continued to sell-off for a second consecutive month, representing the worst performing sector in the index (-2.06%), joined at the bottom of monthly performers by basic materials (-1.72%), transports (-1.71%) and financial companies (-1.51%) – due almost entirely to the release of the whistle-blower report and related sell-off in General Electric (GE). For the first time in a while, lower-rated credit (BBB -1.28%) failed to outperform its higher-rated counterparts (AA -0.77%, A -1.00%) within the index.
Exhibit 2: Spread-to-yield ratio – remains almost a full standard deviation above the mean; indicating spreads have room to tighten and investors may target lower-rated credit
Note: The ratio tends to move in a negative relationship with nominal corporate bond yields. If UST rates were to turn negative, it could make this ratio irrelevant. Source: Bloomberg Barclays US corporate index, Amherst Pierpont Securities
USD IG supply dipped -4% year-over-year in August, after last month’s tremendous +45% gain over the prior year. The month brought $84 billion in new IG supply, plus an additional $14 billion in high yield, which was down -21% from August 2018. The jumbo print in OXY/APC of $11 billion in M&A financing and XOM’s $7 billion multi-tranche launch helped bolster the overall total in IG. August’s IG supply was the lowest level since a very quiet 2015 ($52 billion). The first week of September brought a flurry of anticipated activity. Perhaps a surprising amount came in the EUR-denominated corporate market, despite the collapse of long-end rates in UST over the past several weeks. Most notably, Danaher brought a five-part €6.25 billion deal to help finance its purchase of GE’s bio-pharma business, which is a credit positive for GE as it indicates execution on the deal is progressing as planned. The all-cash total deal size is over $20 billion, so there will likely be a USD launch as well. It’s a small sample set obviously, but just judging from the activity to kick off September new issue season, issuers seem to be tapping both the USD and EUR markets with similar enthusiasm.
Exhibit 3: August supply recap
Source: Bloomberg, Amherst Pierpont Securities
According to Bloomberg, estimates have September’s anticipated seasonal burst of activity in the $110-125 billion range, which is more likely to come at the lower end of that range. The past three years’ September totals for IG were elevated at $150 billion, $141 billion and $153 billion respectively, and were partly aided by jumbo deals by Cigna in 2018 and Takeda in 2016. Despite low rates and the strong global appetite for USD spread product, original expectations were that activity this month could be bit more subdued, given the limited backlog of notable M&A deals that still need funding following the OXY/APC launch in August and DHR tapping the EUR market first. In addition, the bigger serial issuers (i.e. money center banks) had typically been addressing their maturity schedules earlier in the calendar year.
So far that has not been the case, unless this indicates a tremendously front-loaded month in progress. Late summer saw a fresh round of “opportunistic” tender-and-issue activity, which is already evident in September with Disney’s tender-and-issue 6-part offering to take out high coupon legacy paper in its own cap structure and 21st Century Fox (other tender/issues from UNM, APH, BBVA as well). DIS’s debt launch was part of a record-breaking 21 issuers and staggering $21 billion in volume on the first day of the month. That was followed by 14 separate issuers tapping the IG market on Wednesday, bringing the month-to-date total over $50 billion in just two days. Thursday brought another full slate of issuers as well, bringing the MTD total to a record over $70 billion. Apple (AAPL) brought its first debt issue since 2017, a five-part $7 billion launch that matched their last trip to the public debt market. The rest of the haul so far has been highly diverse, including high-quality bellwethers (KO, AAPL, DIS), more REITS (SPG, HIW, ACC, HTA), more utilities (EXC, SO, XEL, PPL), more energy/pipes (PSXP, ENBL, MPLX), banks (C, JPM, WFC, CS, COF, KEY), and a mix of other industries.
Exhibit 4: August 2019 – Index performance by sector
Source: Bloomberg Barclays US corporate index, Amherst Pierpont Securities
Exhibit 5: August 2019 – Index performance by rating
Source: Bloomberg Barclays US corporate index, Amherst Pierpont Securities
Exhibit 6: August 2019 – Index performance by maturity
Source: Bloomberg Barclays corporate index, Amherst Pierpont Securities
Exhibit 7: Historic spreads – Index OAS and A vs BBB credit; lower-rated credit finally under-performed amidst the August back-up in credit
Source: Bloomberg Barclays US corporate index, Amherst Pierpont Securities
IG corporate bond index – year-to-date 2019 return attribution summary
Exhibit 8: Year-to-date – Index performance by sector
Source: Bloomberg Barclays US corporate index, Amherst Pierpont Securities
Exhibit 9: Year-to-date – Index performance by rating
Source: Bloomberg Barclays US corporate index, Amherst Pierpont Securities
Exhibit 10: Year-to-date – Index performance by maturity
Source: Bloomberg Barclays US corporate index, Amherst Pierpont Securities
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 SCM’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, SCM 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.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’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, SCM or any of its affiliates 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.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
