The Long and Short
IG corporate bond index comes full circle in 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. This material does not constitute research.
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
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