The Long and Short

Stay overweight communications, energy, industry

| November 5, 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 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

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 © 2023 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