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September return attribution summary
admin | October 4, 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.
Positive excess return in investment grade corporate bonds helped offset the back-up in rates during the month of September, while the active new issue calendar continues to help shape investor behavior.
Below is a summary of how the sectors within the IG Index are expected to perform for the next several months, on an excess return basis (total return net of commensurate UST return). These serve as a proxy for recommendations for how portfolio managers should position their holdings relative to the broad IG corporate bond market. Better performance from lower-rated segments with greater risk compensation (OAS) is anticipated, as global investors continue to move out the credit spectrum in the search for higher yields in USD spread product. There have been no changes to sector recommendations heading into the final quarter of 2019, as investors’ collective appetite for yield appears to be offsetting trepidation in equity markets.
Exhibit 1: Sector recommendations for remainder of 2019
Source: Bloomberg Barclays US Corporate Index
The spread-to-yield ratio (Exhibit 2) dropped sharply since the beginning of September, and now sits closer to the mean as spreads tightened and rates backed up modestly. Spreads are tight, but not nearly at the historic levels at this time last year, precipitating the rapid sell-off (beginning on Oct 5, 2018) through ’18 year-end.
Exhibit 2. Spread-to-yield ratio
Note: the ratio tends to move in a negative relationship with nominal corporate bond yields. If US Treasury rates were to turn negative, it could make this ratio irrelevant. Source: Bloomberg Barclays US Corp Index, Amherst Pierpont Securities
USD IG supply increased +14% year-over-year in September (Exhibit 3), as the robust new issue market pushed year-to-date volume over a $1 trillion with three months remaining. That leaves IG only -4% down from the prior year, as the September haul offset some of the earlier softness in supply. The year-over-year gain is even more impressive in the context of the super jumbo Cigna deal for $19 billion contributing to the September 2018 total. This year included some large, well-participated deals, such as PEMEX ($7.5 billion), AAPL’s first trip to the USD debt market since 2017 ($7 billion), a large-scale tender-and-issue from DIS ($7 billion), and block deals from JPM ($5 billion) and PYPL ($5 billion). There were no double-digit deals or massive M&A funding, making the overall total a function of more widespread activity. High Yield added an impressive $34.8 billion in additional USD volume – the most in any single month since September 2017.
Exhibit 3: Supply recap for September and year-to-date
Source: Bloomberg
Though total returns moved negative with the back-up in rates, the IG corporate bond index still returned +0.52% in excess return for the month (Exhibit 4). The YTD total stood at just under +4% for 2019, with Index total return still over +13% YTD – now lower than domestic equities, but still among the leaders in fixed income performance for the year. As has been the case for much of calendar 2019, this month’s sector performance was once again led by finance companies, which delivered an impressive excess return of +1.48% – once again favored by the inclusion of longer-dated legacy GECC paper (GE ‘35s), but also due to performance in some of the lower-rated aircraft lessors (such as AYR), as well as higher-beta business development company (BDC) and new Index member FSK, in what appeared to be a pretty clear down-in-credit trade in some of the non-bank financials. Energy (+0.85%) and capital goods (+0.83%) rounded out the top performers in September, while more defensive sectors such as utilities (+0.24%, +0.36%), banks (+0.25%) and transports (+0.28%) were among the bottom performing segments, along with REITs (+0.27%). Higher-rated issuers struggled the most within the REIT industry, as investors sought out more risk for more spread.
Exhibit 4: September 2019 – Index performance by sector
Source: Bloomberg Barclays US Corp Index
Exhibit 5: September 2019 – Index performance by rating
Source: Bloomberg Barclays US Corp Index
Exhibit 6: September 2019 – Index performance by maturity
Source: Bloomberg Barclays US Corp Index
IG Corporate Bond Index – YTD 2019 return attribution summary
Exhibit 7: YTD Index performance by sector
Source: Bloomberg Barclays US Corp Index
Exhibit 8: YTD Index performance by rating
Source: Bloomberg Barclays US Corp Index
Exhibit 9: YTD Index performance by maturity
Source: Bloomberg Barclays US Corp Index
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