The Long and Short
A faster than expected recovery favors basic industry
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The sector weighting recommendation on basic industry (materials) changes in February to overweight from underweight. This reflects expectations for a more rapid global economic recovery than the market is currently anticipating. Excess and total returns were flat to negative for the month of January for the broad investment grade corporate bond index. A review shows REITs and finance companies were the top performing credit sectors, while energy appears to have been impacted by ratings agency announcements.
A summary of how APS expects sectors within the investment grade index to perform for the next several months on an excess return basis (total return net of commensurate UST return) are presented in Exhibits 1 and 2. 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 February 2021
Source: Amherst Pierpont, Bloomberg/Barclays US Corp Index
Exhibit 2: APS Sector Recommendations for February 2021
Source: Amherst Pierpont, Bloomberg/Barclays US Corp Index
Spreads closed the month little changed in aggregate (Index OAS +1 bp), despite the fact that the market appeared to remain in a “risk-on” posture for credit. The IG Corporate Bond Index generated -0.06% excess return for the month, while total return was -1.28% with the sell-off in US Treasuries.
REITs (0.45% excess return) and finance companies (0.29%) generated the top credit returns in the Index amidst a flat month, as the appetite for low BBB credit persisted. Rounding out the top 5 sector performances for January were utilities (0.25%), natural gas (0.24%) and basic industry (0.22%), demonstrating a very mixed approach to credit risk. For the first time in several months, energy (0.01%) failed to land among the top sectors within the index, as the energy trade appeared to take breather; although much of that flat performance can be attributed to the reaction to S&P’s decision to put several of the energy majors on watch negative late in the month. Citing energy transition, price volatility and pressures on profitability, the rating agency placed nine oil and gas companies on review for downgrade, which it expects to resolve in the next several weeks, while also affirming the ratings and revising the outlooks on two companies to negative from stable (BP and Suncor). The five worst performances in January included communications (-0.38%), technology (-0.34%), banking (-0.21%), consumer cyclical (-0.08%) and capital goods (-0.05%), as investors appeared to continue to seek out higher-yielding opportunities even as aggregate spreads bumped along the bottom throughout the month.
The IG new issue calendar handily beat expectations for the month, but failed to outpace January 2020. Total volume was $137 billion versus $157 billion in the prior year. Debt launches in the month were bolstered by a jumbo deal of $10 billion from 7-Eleven (SVELEV: Baa2/AA-*-) and a particularly active month from the bank/finance sectors – first by yankee issuance and later by the big US money center banks exiting their earnings blackout periods. Overall corporate debt placement year-over-year was flatter when taking into consideration the big gains over the prior year in High Yield and the EM, with HY new issue volume of $58 billion (+25%) and a record month for emerging markets.
Exhibit 3. Supply Recap – January IG volume fails to outpace 2020 despite a highly active month for bank/finance and the jumbo 7-Eleven launch
Source: Bloomberg LP
Exhibit 4. REITs and FinCos among the top performances in January
Source: Bloomberg Barclays US Corp Index
Exhibit 5. “Down-in-credit” strategies persisted despite spreads closing flat for the month
Source: Bloomberg Barclays US Corp Index
Exhibit 6. The 5-7 year bucket saw the best credit returns last month
Source: Bloomberg Barclays US Corp Index
Exhibit 7. Airlines, REITs, Hospitals and Natural Gas produced outsized gains in January
Source: Bloomberg Barclays US Corp Index
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