Uncategorized

October return attribution summary

admin | November 1, 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.

Positive excess return with investment grade credit mostly tighter; rates contributed very little to total return on a round-trip month. Portfolio managers should continue to overweight lower-rated segments with greater risk compensation (OAS), as a flatter yield curve implies global investors will move further out the credit spectrum in USD spread product in an attempt to meet performance hurdles. The consumer non-cyclicals sector (16.3% of IG Index) recommendation is moving to a market weight from an over weight, and basic industry (3.1%) rises to an over weight from a market weight (Exhibit 1).

Exhibit 1. Sector recommendations for remainder of 2019

Note: Sector recommendations are made on an excess return basis (total return net of commensurate US Treasury return). The recommendations serve as a proxy for how portfolio managers should position their holdings relative to the broad IG corporate bond market. Source: Bloomberg Barclays US Corp Index

Compensation for lower credit within IG grinds tighter; but while it might seem that appetite for risk is pricing out BBB credit, the opportunity for moving down in quality has not bottomed, as seen in the lower bound results throughout 2017-2018 (Exhibit 2).

Exhibit 2: BBB vs A Corp spreads (5-year history)

Source: Bloomberg Barclays US Corp Index

Alternatively, the appetite for the highest tranche of high yield credit (BB) has never appeared higher in recent history, at least in relation to BBB IG credit spreads (Exhibit 3).

Exhibit 3: BB vs BBB Corp spreads (1- to 5-year sector, 5-year history)

Source: Bloomberg Barclays US Corp Index

Exhibit 4: USD corporate bond supply (amounts in billions)

Source: Bloomberg

USD IG supply dropped -14% year-over-year to $86 billion in October, as new issue severely tempered from early September’s record-setting pace. Nevertheless, the performance versus 2018 hardly represents a major drop-off in activity, as Oct ’18 included a one-time, massive $27 billion 12-part new issue from Comcast (CMCSA), which was funding its $36 billion deal for Sky at the time. CMCSA was also among this month’s biggest issuers, but no IG credits brought jumbo deals in October, and only one issuance (WFC post-earnings) even surpassed the $5 billion mark. High yield provided an extremely impressive $25 billion in USD October supply, more than triple last year’s tally for the month – further fueling the +38% increase in volume YTD. Investor appetite for risk has been best illustrated in the high yield market, particularly in the higher-rated BB segment of the market (Exhibit 3).

IG issuance in October was aided by late push over the last week of the month. On Tuesday alone, nine issuers brought just under $17 billion in USD IG debt, led by Comcast’s $4.75 billion in re-fi debt and Danaher’s (DHR: A2*-/A*-) anticipated USD leg of acquisition financing for its $21 billion purchase of GE’s BioPharma segment announced back in February. The five-part launch contributed $4 billion to the haul, and followed its recent launch of €6.25 billion in the euro market. Late new issue in the month also included “highly opportunistic” and high-quality deals with extremely low concessions, and issuers more aggressively targeting costs in their own capital structures via tender/redemption – further terming out maturities and pursuing second, third or even fourth round attempts to target higher coupon issues.

October sector returns

Rates were little changed on a net basis, contributing only 10 bps to October Total Returns (+0.61%) for the IG Corporate Bond Index. The remainder came from tighter spreads, which helped generate Excess Return of +0.51% in October. This month’s additional returns help IG Corps maintain their FI market-leading level with YTD Total Return performance for of +13.9%. After an initial back-up in the first week of October to a wide of +121, the IG Index OAS tightened to +110 at month-end.

Insurance paper (+0.78% Excess Return) took the top spot in the IG Index this month, led by performance in lower-rating constituents, such as AIG, as well as long-dated issues in bellwether names, such as MET and PRU. REITs (+0.76%) were also among top performers, despite or perhaps resulting from several weeks of active new issue from the segment; but also continuing to demonstrate the market’s appetite for BBB credit. Also among the top performers for October was Communications (+0.73), where performance was aided by several high profile recapitalizations, with large-scale tender/exchange efforts helping to drive valuation.

Although Finance Companies (+0.57%) excess returns came out ahead of the Index average in October, it was the first time in recent memory that it was not among the top performers in a positive credit month. The subgroup has been favored by the inclusion of longer-dated legacy GECC paper (GE ‘35s), as well as the rally in Aircraft Lessors throughout the 2^nd and 3^rd quarters. Renewed Boeing 737 Max concerns diminished spread opportunity were enough to keep that industry at bay. Meanwhile, GE reported positive results late in the quarter, but was not enough to help land FinCos among the top performers yet again.

Not surprisingly, higher-rated, defensive segments made up the bottom of the Index performers for the month, including: Tech (+0.43%) and Capital Goods (+0.39%) and Consumer Cyclical (+0.42%), where the worst performances came from high-rated names such as HD, WMT, AMZN and TOYOTA. Energy (+0.11%) was the single worst performance in the Index (excluding negligible Industrial-Other) amidst some mixed earnings among key names in midstream and E&P for 3Q19. We remain Over Weight on Energy within the IG Index and see the residual back-up in higher beta names as an opportunity to increase exposure.

Source: Bloomberg Barclays US Corp Index

Exhibit 6: Index performance by rating – September 2019

Source: Bloomberg Barclays US Corp Index

Exhibit 7: Index performance by maturity – September 2019

Source: Bloomberg Barclays US Corp Index

IG Corporate Bond Index: 2019 return attribution summary year-to-date

Exhibit 8: Index performance by sector – year-to-date

Source: Bloomberg Barclays US Corp Index

Exhibit 9: Index performance by rating – year-to-date

Source: Bloomberg Barclays US Corp Index

Exhibit 10: Index performance by maturity – year-to-date

Source: Bloomberg Barclays US Corp Index

admin
jkillian@apsec.com
john.killian@santander.us 1 (646) 776-7714

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 © 2023 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.