The Long and Short

Corporate credit outperforms in May

| June 4, 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 bulk of performance in investment grade corporate bonds in May was generated via credit, as Treasuries remained relatively unchanged on a net basis from beginning to month-end. Investment grade net OAS spreads tightened by 9 bp in the month, generating a 0.72% positive excess return, making up the vast majority of the sector’s 0.77% of total return for May.

The energy trade was back on in May as global oil prices continued to rally, with the sector generating an IG-leading 1.28% excess return on 17 bp of net OAS tightening. Also among the top-5 sector performances were consumer non-cyclical (0.84%)—as pharma credit had appeared overdue for a correction—transportation (0.82%), basic industry (0.79%), and a tie between insurance and communications (both at 0.78% on 8 bp of net OAS tightening). Segments with higher aggregate duration appeared to perform better throughout the month, independent of sector betas. Transports managed to make the top of the list despite the fallout of the CNRCN/CP/KSU merger triangle, as the shippers UPS and FDX delivered impressive results in F1Q21.  The bottom performing sectors included REITs (0.45%)—dropping from the top of the list in the prior month—technology (0.45%), consumer cyclical (0.48%), utilities (0.52%) and broker-dealer/asset managers (0.56%).

There are no changes to our sector weighting views this month. Current positions reflect our expectations for a more rapid global economic recovery throughout 2021 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 June 2021

Source: Amherst Pierpont, Bloomberg/Barclays US Corp Index
Color = recommendation: Green – Overweight, Red – Underweight, Yellow – Marketweight
Size = Market Value within the IG Index

Source: Amherst Pierpont, Bloomberg/Barclays US Corp Index

New supply

New IG corporate supply was nearly $138 billion in May, coming mostly in-line with expectations heading into the month. The market is anticipating roughly $120 billion in new IG supply for June. Year-over-year IG issuance was down nearly 50% off the lofty totals logged during last year’s Fed-assisted issuance spree. Meanwhile, high yield continued to outpace last year’s monthly totals with $59 billion in May volume. The IG monthly total was aided by a somewhat surprising $18.5 billion jumbo debt launch from Amazon (AMZN: A1/AA-/A+), which came independent of its later announcement to purchase MGM studios for $9 billion in cash. Yankee banks were active in the month, perhaps taking a cue from the domestic money centers’ issuance bonanza in the previous month.

Exhibit 3. Supply Recap – IG issuers meet May expectations with help from Amazon’s jumbo debt launch

Source: Bloomberg LP

Exhibit 4. Energy trade back on in May

Source: Bloomberg Barclays US Corp Index

Exhibit 5. Investors targeted BBB credit but appeared less enthralled with the highest beta credits within that tranche (BBB-)

Source: Bloomberg Barclays US Corp Index

Exhibit 6. Long-dated paper outperformed as 30-year treasuries sold off and then recovered throughout the month

Source: Bloomberg Barclays US Corp Index

Exhibit 7. Very mixed bag at the top and bottom of the list, some energy and business development companies (BDCs) continued to thrive, airlines noticeably absent this month

Source: Bloomberg Barclays US Corp Index

Exhibit 8. Energy and Finance Cos have remained prominent trades 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. Treasury sell-off YTD has heavily influenced spread performance

Source: Bloomberg Barclays US Corp Index

Exhibit 11. Airline credits and BDCs remain the top trades of 2021

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 © 2024 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