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March 2021 return attribution summary

| April 9, 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.

Continued rate turbulence largely defined performance in the investment grade index, as March total return was -1.72% for the second consecutive month. Credit spreads rallied by 4 bp in aggregate to generate a positive 0.29% credit return, but not nearly enough to offset the sell-off in Treasuries. Highlights include a massive tightening by AT&T which helped drive communications to be the top performing sector for the month, and the ongoing recovery story in GE.

There are no changes to our sector weightings this month. Current positions reflect our expectations for a more rapid global economic recovery in 2021 than the market is currently anticipating. 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) is shown in Exhibits 1 and 2. These weightings serve as a proxy for how portfolio managers should position their holdings relative to the broad IG corporate bond market.

Exhibit 1 and 2. APS Sector Recommendations for April 2021

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

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

Communications (1.09% credit return) was the top performing sector in the index for March, led in part by extraordinary tightening in AT&T (T: Baa2/BBB/BBB+) credit throughout the month as well as the better spread performance among longer-dated segments of the market. Also among the top 5 performances were finance companies (0.85%), energy (0.70%), consumer non-cyclicals (0.57%) and transportation (0.49%). Top performing issuers for the month included airlines, healthcare facilities, select retailers (such as KSS) and the continued recovery story in General Electric (GE: Baa1/BBB+*+/BBB) – which received a huge bump from the announcement of the sale of GECAS (APS Strategy – GE sale of GECAS), and plans to use proceeds for debt reduction. The weaker sector performances were mostly delivered by financials, with banking (-0.23%), brokers/asset managers (-0.11%), and REITs (-0.06%) and insurance (0.19%) all among the bottom 5 sectors in March.

The IG new issue calendar came in well above expectations for $135 billion with $194 billion is total aggregate supply for the month. The grand total was bolstered by several jumbo deals that priced in March, particularly the landmark $25 billion debt launch from Verizon (VZ: Baa1/BBB+/A-), a $15 billion deal from Oracle (ORCL: Baa2/A/BBB+), and $10 billion in USD debt from Siemens AG (SIEGR: A1/A+). Despite the strong showing from issuers, the debt total came well short of the prior year month when backstopping from the Fed fueled a deluge of issuance in the early phases of the pandemic last year. High yield added an impressive $63 billion in March, and now accounts for the full amount of year-over-year growth in the total corporate bond market year-to-date.

Exhibit 3. Supply Recap – Jumbo deals help top estimates for the month

Source: Bloomberg LP

Exhibit 4. Financials are the clear loser in March as rate turbulence creates a mixed bag among the monthly winners

Source: Bloomberg Barclays US Corp Index

Exhibit 5. Credit preference somewhat mixed as investors sought safety of AAs but were not immune to BBB risk

Source: Bloomberg Barclays US Corp Index

Exhibit 6. Once again, the long-end of the curve sees the most spread compression as rates continued to sell off

Source: Bloomberg Barclays US Corp Index

Exhibit 7. Airlines and Healthcare facilities shine while Financials largely among the mixed group of bottom performers

Source: Bloomberg Barclays US Corp Index

Exhibit 8. Energy trade has remained prominent YTD

Source: Bloomberg Barclays US Corp Index

Exhibit 9. Investors seeking higher yielding, lower rated credits YTD

Source: Bloomberg Barclays US Corp Index

Exhibit 10. Treasuries sell-off has heavily influenced spreads YTD

Source: Bloomberg Barclays US Corp Index

Exhibit 11. Airline credits lead the charge

Source: Bloomberg Barclays US Corp Index

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