The Long and Short

A mixed performance across sectors to close out 2020

| January 8, 2021

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.

December played out as largely a continuation of the prior month, with the market remaining in a “risk-on” posture for credit. Finance and energy companies were among top performers for the month, though energy remained in negative territory for the year, badly underperforming the broader investment grade index. Some traditionally defensive segments had weak performances on the month as investors sought higher yields elsewhere, but managed to outperform the index for the year. The investment grade corporate bond index tightened an additional 10 bp in aggregate OAS, resulting in a 0.85% excess return for December. Total return was 0.44%, as Treasuries backed up moderately following the November rally. The move in credit left the index 9 bp tighter than where it ended the prior year, with the additional coupon carry providing the bulk of returns for 2020.

There are no changes to our sector weighting recommendations for January. Our updated views on the market, which include numerous revisions made in December for the first half of the year, can be found in APS Strategy: Corporate Bond Outlook 2021. Below we provide 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 we recommend that portfolio managers should position their holdings relative to the broad IG corporate bond market.

Exhibit 1. APS Sector Recommendations for January 2021

Source: Amherst Pierpont Securities, Bloomberg/Barclays US Corp Index

Finance companies (2.62% excess return) retook the top spot in monthly performance, where they spent much of the second half of 2020, led by the sharp recovery in aircraft leasing credits and General Electric. Still, the energy trade remained firmly in place in December, producing the second highest return (+2.11%) in the Index as global oil prices rallied over $50 per barrel. Energy closed the year in negative territory with a 2020 excess return of -5.05% versus 1.32% for the overall Index, while finance companies managed to outperform at 2.26%. The top five performances in December were rounded out by REITs (+1.31%), basic materials (+1.22%) and capital goods (+1.21%) – due in large part to the rapid recovery in Boeing with the resumption of 737 MAX flights during the month. The five weakest returns in December were delivered by broker-dealer/asset managers (0.45%), technology (0.51%), utilities (0.57%), banks (0.58%) and communications (+0.66%) as investors sought higher-yielding opportunities elsewhere within the Index. Most of these predominantly defensive segments that delivered weaker performances at year end still managed to outperform the broader Index for the year, but fizzled in later months as investors increasingly targeted more spread in higher risk and more cyclical areas of the market.

The IG new issue calendar closed out its record-shattering year on a sound note, with December producing an additional ~$46 billion in IG supply, a 57% increase over the prior year period. The last several weeks of activity brought the annual total north of $1.9 trillion, with high yield credit providing an additional $441 billion in total volume. As we addressed at length in our Outlook piece referenced above, we anticipate a significant drop in volume for calendar 2021 (roughly 15-20% year-over-year); however, our expectations are that net supply to the market will fall in a much lower range (5-10% YoY) than many are anticipating, as less debt proceeds will be directed to the early retirement of debt.

Exhibit 2. Supply Recap – December caps a record-shattering year for IG new issue

Source: Bloomberg LP

Exhibit 3. Energy and FinCos continued their outperformance to close out the year

Source: Bloomberg Barclays US Corp Index

Exhibit 4. The “down-in-credit” trade persisted for another month

Source: Bloomberg Barclays US Corp Index

Exhibit 5. The belly of the curve saw the most impressive total return in December

Source: Bloomberg Barclays US Corp Index

Exhibit 6. Top-performing credits continued to include aircraft lessors, business development companies, retail, retail REITs and energy

Source: Bloomberg Barclays US Corp Index

IG Corporate Bond Index – Year-to-Date (YTD) Return Attribution Summary

Exhibit 7. Despite recent traction, energy closes the year in negative territory

Source: Bloomberg Barclays US Corp Index

Exhibit 8. Defensive strategies held best full-year performance, despite the rapid recovery in higher yielding credit in 2H20

Source: Bloomberg Barclays US Corp Index

Exhibit 9. Belly of the curve (3-7yr) provides best overall credit returns for 2020

Source: Bloomberg Barclays US Corp Index

Exhibit 10. Mixed bag with issuers who came at the height of the pandemic among those topping the list for 2020; airlines, energy, and retail remain among the year’s bottom performers despite recent rally in spreads

Source: Bloomberg Barclays US Corp Index

Dan Bruzzo, CFA
dan.bruzzo@santander.us
1 (646) 776-7749

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.

The Library

Search Articles