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Credit spreads tightened as Treasuries sold off in October

| November 6, 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 investment grade corporate bond index recovered nicely from the modest sell-off in September, generating a positive excess return of 1.20% as aggregate OAS tightened by 14 bp in October. The sell-off in US Treasuries throughout the month outweighed the credit rally, resulting in a -0.18% total return for the index. There are no changes to our sector recommendations for November.

Exhibit 1. APS Sector Recommendations for November 2020

Note: The table provides a summary of how APS expects sectors within the IG Index to perform for the next several months, on an excess return basis (total return net of commensurate UST return). These weightings 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, Amherst Pierpont Securities

For a third consecutive month, finance companies (+2.14% excess return) provided the single best performance in the IG Index, aided by the surprisingly optimistic results and outlook posted by General Electric (GE) for the third quarter of 2020, which caused a quick rally in spreads. The sector also benefited from a continued relief rally among aircraft lessors, despite the fact that the recent Covid-related setbacks, both domestically and abroad, serve to threaten the recovery in airline travel. Also among the top 5 sector performances were insurance (+1.81%), natural gas (+1.80%), basic industry (+1.72) and utilities (+1.41%). The late-month selloff in global oil prices was apparent in corporate trading as energy (+0.78%) lagged most of the entire index for a second consecutive month. Other bottom performers included REITs (+0.94%), technology (+0.96%), and banking (+0.99%), while most other segments were all closely in-line with the aggregate index performance.

The IG new issue calendar narrowly topped consensus expectations for October, delivering just over $95 billion in total volume for the month. This represented a modest gain over the prior year period ($89 billion), and a seasonal step down from the triple-digit volumes over the prior two months. High yield added just under $40 billion in additional issuance, a nearly 60% increase over October of 2019, and enough to boost total corporate USD issuance by 20% year-over-year. Activity tapered off demonstrably in the later sessions of the month, as issuers await clarity on the election results. Still, expectations are tempered for November, as the $70-75 billion estimates seem to be on the high side given not only seasonal and holiday related weakness, but also the uncertainty of the election outcome potentially keeping issuers sidelined for longer than expected.

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 Return Attribution Summary

Source: Bloomberg Barclays US Corp Index

Source: Bloomberg Barclays US Corp Index

Source: Bloomberg Barclays US Corp Index

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