The Long and Short
April brings only showers for IG
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.
The investment grade corporate bond index delivered one of its worst monthly performances on record in April, as rising rates and a sharp widening in credit contributed to a staggering negative 5.47% total return. Investment grade corporate bond spreads widened by 23 bp leading to a -1.81% excess return over Treasury debt for the month. The index OAS closed at 135 bp – the widest level since September of 2020. On a CDX basis, the IG market is at the worst levels recorded since the earliest recovery from the pandemic, in June of the same year.
The relative value view on technology shifts to neutral from undervalued this month, as rate hikes will likely continue causing extreme volatility for tech stocks and putting pressure on spreads. We are not moving to an overvalued view, as balance sheets remain largely in good shape. 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 suggestions 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 May 2022
Source: Amherst Pierpont, Bloomberg/Barclays US Corp Index
Color = recommendation: Green – undervalued, Red – overvalued, Yellow – neutral
Size = Market Value within the IG Index
Source: Amherst Pierpont, Bloomberg/Barclays US Corp Index
It was extremely difficult to find winners amidst the April selloff in credit. Investors sought out the safety of the highest rated credits within the Index, or at least that’s where credits were less impacted by the move wider in spreads. By sector, the least bad performances were delivered by finance companies (-1.08 excess return)—aided by the recovery in aircraft lessors AER and AL—REITs (-1.29%), brokers/asset managers (-1.47%), consumer cyclical (-1.51%) and banking (-1.53%). The single worst performance in the index was delivered by the communications sector (-2.58%) as longer durations were hit hardest and recent new issue in the segment may have weighed heavily on secondaries. Other bottom performers included transportation (-2.28%), consumer non-cyclical (-2.01%), energy (-1.93%) and technology (-1.90%).
The investment grade new issue calendar moderately exceeded expectations during April, even as several deals were delayed or shelved during highly turbulent sessions toward the close of the month. In total the IG new issue market produced $113.5 billion in total volume on estimates in the $95 to 100 billion range for the month. It was a modest year-over-year decline in volume, and year-to-date issuance now stands almost perfectly flat with the first four months of calendar 2021. There were several jumbo debt deals throughout April including double-digit launches from Amazon ($12.75 billion) and Bank of America ($10.75 billion). The high yield market added just $11.8 billion in additional corporate volume and continues to operate in limited capacity amidst heightened concerns on both rates and credit. May traditionally represents a busy month for the primary calendar, as issuers typically seek to issue ahead of the slower summer months. Estimates heading into the month are for $125 to 150 billion in total volume.
Exhibit 3. Supply Recap
Source: Bloomberg LP
Exhibit 4. Communications and Transports are hit hardest in April credit selloff
Source: Bloomberg Barclays US Corp Index
Exhibit 5. Investors continue to favor higher rated credits in selloff
Source: Bloomberg Barclays US Corp Index
Exhibit 6. Longer dated paper hit hardest in selloff
Source: Bloomberg Barclays US Corp Index
Exhibit 7. A mixed bag of individual performers, KSS and ACC spike on takeover plans
Source: Bloomberg Barclays US Corp Index
Dan Bruzzo, CFA
dan.bruzzo@santander.us
1 (646) 776-7749
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