The Long and Short
Stay overweight communications, energy, industry
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Investment grade corporate bonds ground tighter in October, even as investor preference appeared to shift to more stable, higher-rated credit. The Bloomberg Barclays Investment Grade Index tightened by 6 bp over the course of the month, resulting in excess return of 0.47% and a total return of 0.25% including the change in US Treasuries. The latest move brings the year-to-date spread change to -34 bp, which has generated a positive 2.78% in excess return versus the negative 1.02% total return for the IG sector.
Our sector weighting view recommendations remain unchanged for November. 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 November 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
Transportation (1.05% excess return) provided the top performance in the index, aided by a continued recovery in airline paper. Other top performing market segments included electric utilities (0.77%), finance companies (0.70%), capital goods (0.68%) and energy (0.65%). Both finance companies and capital goods were given a boost by sharp trading in General Electric (GE: Baa1/BBB+/BBB) paper – in particular, the GE 2035s and 2025s issued by GE Capital Intl. Funding Co., which are classified in finance companies for index purposes. Investors believe these bonds are nearly certain to be a big part of GE’s next large debt tender, which could be approaching in a number of days with the closing of the AER/GECAS deal on November 1. GE bonds tightened as AerCap launched its $20 billion debt funding package and GE management guided the closing of the merger and reiterated its plans to allocate all proceeds to debt reduction. Under-performing sectors included banking (0.13%), broker/asset manager/exchange (0.31%), technology (0.36%), insurance (0.43%) and consumer cyclical (0.43%).
New issue volume for the IG corporate bond market well exceeded expectations at $120.8 billion in October and outpaced the prior year period for the first time in several months. October issuance was aided by the $20 billion AerCap (AER) mega-deal, as well as a very active string of jumbo post-earnings issues from Goldman Sachs ($9.75 billion), Morgan Stanley ($6.3 billion), Citigroup ($5.0 billion) and Bank of America (just shy at $4.55 bn). Banks have been more aggressive with late-year debt issuance than most were expecting; JPM is already back in the market with another debt deal on the first of November. The market is anticipating another $25 billion in supply this week to kick off the month of November, which is expected to bring $100 billion in total new issue volume. The high yield market tacked on an additional $34.5 billion in October and has vastly outpaced the prior year volume.
Exhibit 3. Supply Recap
Source: Bloomberg LP
Exhibit 4. Transportation takes the top spot as airline paper rallies, while the banking sector sputters amidst an influx of supply
Source: Bloomberg Barclays US Corp Index
Exhibit 5. Investors appeared to target higher quality credit in October, though spread performance fairly evenly balanced across the credit curve
Source: Bloomberg Barclays US Corp Index
Exhibit 6. Long paper outperforms as the 10s/30s curve flattens in October
Source: Bloomberg Barclays US Corp Index
Exhibit 7. Regional banks and airlines among the top performers; GE tightens sharply as the awaited debt tender comes into focus
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 sought higher-yielding, lower-rated credits YTD even as more recent preference has been for more stable credit quality
Source: Bloomberg Barclays US Corp Index
Exhibit 10. Long paper has held up as the preferred strategy YTD
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
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