The Long and Short

IG corporate bond index comes full circle in 2021

| January 7, 2022

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.

In the final month of 2021, the investment grade corporate bond index tightened by 3 bp, resulting in a positive excess return of 0.29%. Total return wound up in negative territory at -0.08%, as the sell-off in treasuries outpaced the positive return in credit. The index closed the year at +92 bp, just 4 bp tighter from where it closed the prior year, as the credit sell-off in the late months of the year all but wiped out the tightening trend that dominated throughout most of 2021. Excess return for the full year closed at 2.55%, while total return for IG corporates in 2021 was -1.04%.

Our sector weighting view recommendations remain unchanged for January. 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 January 2022

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

In December, some of the familiar sectors that outperformed throughout the year appeared to be back in fashion, albeit amidst limited activity in the secondary market. The top performances were delivered by energy (0.65% excess return), basic industry (0.60%), communications (0.55%), finance companies (0.49%) and consumer non-cyclical (0.34%). Many of these were among the top sector plays in the earlier months of 2021, when credit was rallying more consistently. The bottom five performances were registered by electric utilities (-0.24%), natural gas (-0.06%), insurance (0.11%), REITs (0.15%), and capital goods (0.19%).

New issue volume for the IG corporate bond market in December met expectations at $68.1 billion and well outpaced the final month 2020, thanks in large part to a rash of activity early in the month. The final totals were padded by jumbo debt launches from Merck ($8.0 billion), Petroleos Mexicanos ($6.8 billion), an inaugural debt deal from new issuer Daimler Truck Holding AG ($6.0 billion), and Roche Holding AG ($6.0 billion). High yield issuance added just $12.4 billion to the total amount of corporate paper launched in December but closed the year having issued 17% more than the prior year at $516.8 billion. Meanwhile, the IG market produced just over $1.5 trillion throughout the year, falling by about 21% from the prior year period.

Exhibit 3. Supply Recap

Source: Bloomberg LP

Exhibit 4. Energy, materials and communications lead the pack in December

Source: Bloomberg Barclays US Corp Index

Exhibit 5. Risk-on bets in credit back in fashion

Source: Bloomberg Barclays US Corp Index

Exhibit 6. Intermediate term paper provides the best returns

Source: Bloomberg Barclays US Corp Index

Exhibit 7. Medical care facilities dominate the bottom performances amidst renewed Covid concerns

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