The Long and Short
Relative stability in IG corps during global sell-off in risk assets
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.
Investment grade corporate bonds offered relative stability but were still reasonably hard hit in the global wash-out in risk assets in January. The index widened by 16 bp in the month, resulting in a -1.31% excess return and -3.37% total return. The index closed at +106, the widest level recorded since November of 2020, and the steepest widening trend since the height of the initial pandemic sell-off.
Our sector weighting view recommendations remain unchanged for February. 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 February 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
Financials offered the safest haven in the credit sell-off, with 4 of the top 5 performances by sector being recorded by finance companies (-0.71% excess return), REITs (-0.71%), banking (-0.84%), and brokers/asset managers (-1.03%). The steeper yield curve and higher rates projects to benefit financial credits more so than their industrial and utility counterparts. The fifth best sector performance was recorded by energy (-1.14%), which benefitted from the run-up in oil prices amidst ongoing global inflation. Not surprisingly, sectors with longer-dated duration concentrations made up many of the weakest performance in the index in January. TMT credits were particularly hard hit in the sell-off. The bottom 5 performances by sector were recorded by communications (-1.92%), technology (-1.70%), consumer non-cyclical (-1.58%), insurance (-1.52%) and transportation (-1.47%).
The early rush to price paper in January helped offset the late-month shutdown of the primary market leading up to and immediately following the FOMC. As a result, the $154 billion in IG corporate bond volume for the month exceeded expectations and eclipsed the January 2021 total by 11%. Volume was bolstered by a particularly active post-earnings issuance spree by the US money center banks, as well as earlier activity in the month from a bevy of yankee banks. The big 6 US banks brought almost $20 billion in new debt deals in January alone. Meanwhile, NABAU, UBS, and SOCGEN all brought additional jumbo-sized ($5+ billion) multi-tranche debt launches as well. The high yield market added $28 billion to the corporate total, about half of what they priced in the prior year period.
Exhibit 3. Supply Recap
Source: Bloomberg LP
Exhibit 4. The sell-off in credit felt universally across the index, sectors with long durations among the hardest hit, financials show provide some resistance
Source: Bloomberg Barclays US Corp Index
Exhibit 5. Single-A credit offers the most defensive measures against the wash-out in global credit
Source: Bloomberg Barclays US Corp Index
Exhibit 6. Long duration paper hardest hit in the January sell-off
Source: Bloomberg Barclays US Corp Index
Exhibit 7. Airlines and regional banks among the top performers in January, while TMT visible among the worst performances in the index
Source: Bloomberg Barclays US Corp Index
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