The Long and Short

Sector weightings unchanged amid rates market sell-off

| March 5, 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.

The credit rally resumed in February after a brief pause in January, as the investment grade corporate bond index tightened 12 bp (1.00% excess return) and is now poised to test the post-crisis tights after closing out the month inside of 90 bp (OAS). The late-month sell-off in US Treasuries on renewed concerns over inflation further pressured spreads to offset the move in rates and resulted in a total return of -1.72% – the worst monthly performance since March of last year. A surge in oil prices pulled the energy sector into the lead in February while banking and technology were among the worst performers.

There are no changes to sector weighting recommendations this month. Current positions reflect our expectations for a more rapid global economic recovery than the market is currently anticipating. The two graphics below 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 and 2. APS Sector Recommendations for March 2021

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

Source: Amherst Pierpont, Bloomberg/Barclays US Corp Index

The energy trade was back on in February as the sector produced an index-leading 1.67% excess return in the month, as global oil prices rallied roughly 16% from month-end January. The rest of the top five was rounded out by basic industry (1.28%), communications (1.21%), insurance (1.20%), and capital goods (1.16%). In addition to commodities being targeted by investors in the credit rally, duration was a key component of performance as spreads tightened in part to offset the sell-off in rates. Long-dated media and insurance credits performed exceptionally well in this environment. The worst performances were logged by brokers/asset managers (0.67%), natural gas (0.68%), REITs (0.70%), banking (0.73%) and technology (0.78%). Despite the fact that the rate sell-off in the long-end of the curve serves to benefit bank margins, the sector was still among the worst performers as spreads remain tight and the duration component of performance far outweighed the fundamental lift that saw bank stocks rally throughout the month.

The IG new issue calendar produced $120 billion in total volume, surpassing expectations and setting a new record for February production. Activity was supported by a $14 billion jumbo debt launch from Apple (AAPL: Aa1/AA+), an $8 billion launch from Nippon Telegraph & Telephone (NTT: A1/A), and a bevy of $5+ billion debt launches across numerous sectors. The market is anticipating $135 billion from IG issuers in March, which will likely fall well short of the $264 billion produced in the prior year period, when the enactment of government purchase programs fueled a late-month deluge of issuance that carried over for the next several months.

Exhibit 3. Supply Recap – A jumbo ($14 billion) debt launch from Apple and the $8 billion launch from NPP helped fuel a record February new issue calendar for the IG market

Source: Bloomberg LP

Exhibit 4. Energy trade is back on as oil prices rally 16% throughout February

Source: Bloomberg Barclays US Corp Index

Exhibit 5. Investors continue to target “down-in-credit” strategies across the IG universe

Source: Bloomberg Barclays US Corp Index

Exhibit 6. Long-end of the curve sees the most spread compression as rates sell off in February

Source: Bloomberg Barclays US Corp Index

Exhibit 7. Airlines (again), Energy and BDCs among the top performers for the month

Source: Bloomberg Barclays US Corp Index

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

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