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.
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
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.
