The Long and Short
Corporate credit outperforms in May
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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
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