The Long and Short
Sticking with our story on sector allocation
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The picture of likely excess return across sectors of investment grade corporate debt over the next few months comes out of March roughly unchanged. Communications, basic industry, energy, REITs and technology look the most promising. Utilities looks like a laggard.
The two graphics below provide a summary of how APS expects sectors within the investment grade index to perform for the next several months on an excess return basis—total return net of commensurate Treasury return. These weightings serve as a proxy for how portfolio managers should position relative to the broad investment grade corporate bond market.
Exhibit 1 and 2. APS Sector Recommendations for April 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
The investment grade corporate bond index rallied by 16 bp to produce an excess return of 1.27%, even as bond markets sold off sharply completing one of the worst quarters for rates in recent history. Total return for the index was -2.52% in March and a staggering loss of -7.69% for the first quarter of the year as Treasury rates spiked and continued to move north throughout the first week of April. Excess return over the first quarter was -1.17% as the recent recovery in spreads is bringing the index closer to a flat performance for the year on a credit basis.
The top five performing sectors in March were energy (1.92% excess return), communications (1.91%), utilities (1.74%), transportation (1.68%) and basic materials (1.67%). The recovery in credit spreads was led by commodities sectors and investors sought out more defensive plays within the index. The bottom performing sectors included finance companies (-0.11%), REITs (0.59%), banking (0.61%), brokers/asset managers (0.87%), and consumer cyclical (1.00%). Higher rated credits performed better overall even as spreads rallied sharply throughout the month. Longer dated paper demonstrated the highest credit returns as investors navigated the rate sell-off and the inverted yield curve. The finance companies segment was hit particularly hard by the uncertainty for aircraft lessors with exposure to Russia.
The investment grade new issue calendar produced $235 billion in total volume. Fed rate liftoff had no immediate impact on issuance and investor appetite for credit spurred the fourth highest single monthly production on record. April is expected to generate a more normalized run rate of $90 to $100 billion in total volume. March volume was aided by several jumbo debt launches including the AT&T mega-deal of $29 billion to capitalize the WarnerMedia spin-co entity, Magallanes. The big 6 US money center banks also remained highly active throughout the month, continuing to front-load much of their 2022 issuance needs into the first quarter of the year. To date the big 6 have priced over $74 billion in USD denominated debt in the public market for the year so far. The high yield market added a modest $10 billion in issuance and continues to operate in a limited capacity amidst ongoing rate turbulence.
Exhibit 3. Supply Recap
Source: Bloomberg LP
Exhibit 4. Commodities lead the trend tighter in corporate credit in March 2022
Source: Bloomberg Barclays US Corp Index
Exhibit 5. Investors favor higher rated credits in the ongoing recovery
Source: Bloomberg Barclays US Corp Index
Exhibit 6. Longer dated paper demonstrates outsized returns amidst the rate sell-off
Source: Bloomberg Barclays US Corp Index
Exhibit 7. A mixed bag of individual top performers led by commodities
Source: Bloomberg Barclays US Corp Index
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