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Excess returns turned negative in September
admin | October 2, 2020
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 IG Corporate Index produced its first negative excess return (-0.41%) since March, as aggregate OAS widened by a moderate +5 bp in the late month back-up in credit. Total return was also negative (-1.38%) for the second consecutive month, as the modest rally in US Treasuries on the Fed’s commitment to lower interest rates for longer was not enough to offset the sell-off. There are no changes to our sector recommendations for October.
There were few bright spots in September, as most sectors sold off fairly evenly throughout the Index. For the second consecutive month, Finance Companies (+0.82% excess return) delivered the single best performance in the IG Index. The continued relief rally in airlines translated to further recovery for the Aircraft Lessors, coupled with a strong performance from GE, as management provided an encouraging update on their operating turnaround. Also among sectors with positive returns for the month were Transportation (+0.06%) – again aided by the recovery in the Airline segment – and Capital Goods (+0.05%). Rounding out the top 5 sector performances were Consumer Cyclical (-0.01%) and a tie between Basic Industry (-0.04%) – mostly on the gold trade following the September Fed – and REITs (-0.04%), which saw positive returns among the Healthcare subgroup and some other well-timed new issues that tightened during the month. Energy (-1.30%) bore the brunt of credit selling in September. The steady recovery in oil prices over the past several months finally stalled out, with crude dropping to $40 from $45 in the month. Also among bottom performers were Utilities (-0.55%), Communications (-0.56%), Consumer Non-Cyclical (-0.50%), and Insurance (-0.33%), as longer-duration segments of the market struggled the most to generate positive returns.
Exhibit 1. APS Sector Recommendations for October 2020

Note: Sector recommendations within the IG Index are based on performance expectations over 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.
Source: Amherst Pierpont, Bloomberg/Barclays US Corp Index
IG new issue narrowly edged out the record volume posted in the prior year, with $172 billion in supply throughout the month. High Yield added another $48 billion, recording a +32% gain over the prior year. Although there were some IG launches of notable size, including NSANY ($8 billion), GILD ($7.25 billion), BATSLN ($6.25 billion). DAL ($6 billion), KO ($4.1 billion), Nestle ($4 billion) and TMUS ($4 billion), it is worth highlighting that the market produced record volume without the inclusion of any jumbo size ($10+ billion) debt deals – which typically come from either large scale M&A or wholesale recapitalization efforts. Most of the deals of size were tied to renewed tender efforts to take out maturing or higher coupon debt from the capital structure. The market is expecting a relatively light seasonal haul of about $75 billion for October (a modest step down from 2019 volume), although investors should anticipate that issuers still remaining on the calendar will seek to rush to market ahead of the election next month.
Exhibit 2. Supply Recap

Source: Bloomberg LP

Source: Bloomberg Barclays US Corp Index

Source: Bloomberg Barclays US Corp Index

Source: Bloomberg Barclays US Corp Index

Source: Bloomberg Barclays US Corp Index
IG Corporate Bond Index – Year-to-Date (YTD) Return Attribution Summary

Source: Bloomberg Barclays US Corp Index

Source: Bloomberg Barclays US Corp Index

Source: Bloomberg Barclays US Corp Index

Source: Bloomberg Barclays US Corp Index
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