The Long and Short

Reduce exposure to technology

| October 1, 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.

Investment grade corporate bonds held in steady amidst broad turbulence in US Treasuries and domestic equities at the close of September. The Bloomberg Barclays IG corporate bond index widened by just 1 bp of net OAS, resulting in a flat excess return of -0.04% for the month. Total return was -1.05% with the sell-off in rates. Three quarters through the year, excess return for IG corporates stands at positive 2.31% on 28 bp of net OAS tightening, while total return moved deeper into negative territory at -1.27% year-to-date. Investors should lower their sector weighting for technology to a marketweight from an overweight, while other weightings remain unchanged for October.

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 October 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

Energy (0.39% excess return) and finance companies (0.34%) moved back to the top of the performance list by sector in September, where they have spent much of 2021. Other sectors that beat the overall index for the month included Transportation (0.09%)—thanks in large part to the sharp move tighter in Canadian National Railway (CNRCN) with the termination of its acquisition for Kansas City Southern (KSU) in the middle of the month. The top 5 sector performances were rounded out by utilities (0.06%) and REITs (0.04%).  The bottom performing sectors were led by basic industry (-0.42%) with the sell-off in commodity prices. Other underperformers included communications (-0.31%), consumer non-cyclical (-0.15%), technology (-0.14%), and natural gas (-0.11%).

As anticipated, the IG corporate bond new issue market started off September with a break-neck pace of volume to kick-off the seasonal push by borrowers following the typically slower summer months. Activity fizzled a bit in the latter half of the month but remained strong enough to fall just short of last year’s extraordinary, record-breaking haul. Though we did not see any double-digit launches in the month, volume was bolstered by jumbo deals from Wal-Mart ($7 billion), Sumitomo Mitsui ($5.85 billion) and Nestle SA ($5 billion). High yield posted another strong showing, tacking on over $50 billion to the monthly total and continues to outpace activity from the prior year periods.

Exhibit 3. Supply Recap

Source: Bloomberg LP

Exhibit 4. Energy and Finance Companies provided the best outlet for outperformance in September

Source: Bloomberg Barclays US Corp Index

Exhibit 5. Investors demonstrated continued preference for lower-rated credit even amidst a flat move in spreads

Source: Bloomberg Barclays US Corp Index

Exhibit 6. The belly of the curve provided top performance in credit amidst the sell-off in Treasuries

Source: Bloomberg Barclays US Corp Index

Exhibit 7. Airlines and travel/leisure move to top of the list, while universities, hospitals and some commodities underperform

Source: Bloomberg Barclays US Corp Index

Year-to-Date Index Performances

Exhibit 8. Energy and Finance Cos have remained the prominent trades YTD

Source: Bloomberg Barclays US Corp Index

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

Source: Bloomberg Barclays US Corp Index

Exhibit 10. The long-end of the curve falters YTD amidst the move in Treasury yields

Source: Bloomberg Barclays US Corp Index

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

Source: Bloomberg Barclays US Corp Index

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

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