The Long and Short
A mixed performance across sectors to close out 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. This material does not constitute research.
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
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