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Return attribution summary for November

| December 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.

Portfolio managers should continue to overweight lower-rated segments with greater risk compensation (OAS), while recognizing that the rally throughout the second half of 2019 has diminished near-term expectations for further tightening. After some early turbulence in November, global demand continues to put pressure on the yield curve and lend support to US dollar spread product.

Exhibit 1: Sector recommendations for first half of 2020

Note: Sector recommendations within the IG Index are based on performance expectations for the next several months on an excess return basis (total return net of commensurate UST return). The weightings serve as a proxy recommendations for how portfolio managers should position their holdings relative to the broad IG corporate bond market. Source: Bloomberg Barclays US Corporate Index

The IG market traded mostly sideways throughout November, but netted -4 bp in aggregate tightening for the month to +104 current OAS. The Index generated another +0.65% in excess return for the month (+0.25% total return), bringing the year-to-date performance over Treasuries to an impressive +5.2%, and an even more impressive aggregate total return of +14.6% for 2019.

Lower-rated credit and long-dated paper once again outperformed, and have largely dominated as 2019’s reach for yield continued into the 11th month of the year. Lead performances by sector (Exhibit 2) were in Communications (+1.11% excess return), Insurance (+0.93%), and Finance Companies (+0.94%); meanwhile the weakest performances included Utilities (+0.46%), Energy (+0.41%) and REITs (+0.41%).

Exhibit 2: Index performance by sector – November 2019

Source: Bloomberg Barclays US Corporate Index

The big returns in Telecom and Insurance were largely a function of demand for long duration spread product amidst the back-up and then recovery of the UST 10-year and 30-year in November. Health in particular  was a big driver in the Insurance space, perhaps getting a boost from the big rally in CVS, generating +1.41% in excess return versus +0.93% for Life and only +0.59% in the more intermediate-focused P&C segment. FinCos once again benefited from another leg of recovery in the legacy GECC paper (2035 maturity) still classified as Financials; as well as continued tightening in the aircraft finance subgroup, which has remained among top performers for the past several quarters on reduced Boeing concerns (737 MAX) and substantially improved industry fundamentals.

Exhibit 3: Index performance by rating – November 2019

Source: Bloomberg Barclays US Corporate Index

IG supply increased +8% year-over-year in November to $110 billion, thanks in large part to the Abbvie $30 billion debt deal to fund the AGN purchase. Volume has outpaced 2018 over the past several months, helping narrow the gap on a year-to-date basis to just -3%. More impressive has been torrid pace in the High Yield primary market, which brought a massive $36 billion haul last month, versus an anemic $5 billion in November of the prior year. Aggregate HY volume is up +55% year-to-date over a relatively weak 2018, and has served to exemplify investors’ largely unimpeded appetite for credit risk throughout most of 2019. Available spread compensation between BBB and BB credit has tested historic tights in recent months.

Exhibit 4: Index performance by maturity – November 2019

Source: Bloomberg Barclays US Corporate Index

New charts identify the top and bottom performances by issuer, broken out for November (Exhibit 5) as well as the year-to-date period (Exhibit 10). At the top of the list for last month’s top excess returns were tender bonds, including ROSW ‘35s and KPN’s high coupon ‘30s, which both benefited from offers to redeem the debt at a premium. Among the other more obvious inclusions among top performers was ABBV, as the pricing of the $30 billion new issue, used to fund AGN, drove secondary spreads materially tighter from the prior month.

Exhibit 5: Top 15/ Bottom 15 excess returns by issuer

Source: Bloomberg Barclays US Corporate Index

Also, BHF 27s and 47s continued to tighten with investors reaching for yield. The bonds offer the most spread overall in the Insurance space after heavy selling in the early months of the year. BHF long bonds have been among our recommended trade ideas in recent months, see Downside risk limited in Brighthouse 30-year paper. Likewise, higher-beta TMT issuer DISCA rallied on strong earnings at the beginning of the month and continued improvement in credit fundamentals.

In the less obvious category, several Energy names were included among the top performers for the month, despite the sector falling into the bottom three returns for November. APA, HES, and DVN all turned in top performances for the month, but were not enough to offset the heavier selling in the Pipeline subgroup within Energy. EQM, ETP, MPLX and WMB were among the hardest hit index constituents over the past several weeks.

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

Exhibit 6: Index performance by sector – year-to-date

Source: Bloomberg Barclays US Corporate Index

Exhibit 7: Index performance by rating – year-to-date

Source: Bloomberg Barclays Corporate Index

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

Source: Bloomberg Barclays US Corporate Index

Exhibit 9: Top 20 / Bottom 20 excess returns by issuer – year-to-date

Source: Bloomberg Barclays US Corporate Index

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