Uncategorized
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
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.
