November 14, 2017
Investment-grade corporate bond spreads remain stable, and the near-term outlook is bolstered by positive macroeconomic indicators and strong technicals, which should cause spreads to tighten further as we approach year end. The third quarter presented us with a myriad of possible potholes—multiple missile launches, hurricanes, a potential government shutdown, increased bond issuance, and hawkish comments from the Fed—all of which we successfully navigated. Despite global tensions, natural disasters, and uncertainty surrounding fiscal policy, Barclays Corporate Credit index spreads tightened by 8 basis points over the quarter to 101 basis points and 22 basis points since the beginning of the year. Technicals remain highly favorable, with a mere $554 billion year-to-date net issuance—a decline of 9.4 percent year over year—causing dealer inventories to fall to a summer low. Domestic pension and insurance inflows have added to the strong technical backdrop. Investment-grade mandates, once dedicated to 30-year A-rated credit, are now investing across the entire credit curve and ratings spectrum. Investment-grade fund flows for the third quarter remained robust at $66 billion. The appetite for corporate bond exposure from both Asia and Europe continues at a torrid pace. In some cases, foreign investors have shown a willingness to go down in quality to acquire incremental yield. Our concern is mounting over the current level of complacency surrounding credit risk, event risk, and relative value.
Despite global tensions, natural disasters, and uncertainty surrounding fiscal policy, equity market volatility has declined and Barclays Corporate Credit index spreads tightened by 8 basis points to 101 basis points.
Source: Bloomberg Barclays, Bloomberg, Guggenheim Investments. Data as of 10.19.2017. Realized volatility of daily S&P 500 returns is based on the daily returns of the S&P 500 Index over a rolling three-month period.
The Bloomberg Barclays Investment-Grade Bond index delivered a 1.3 percent total return during the third quarter. BBB-rated corporate bonds are up 6.1 percent for the year while AA-rated and A-rated corporates have returned 4.1 percent and 5.0 percent, respectively. As a result, we have continued to see a significant flattening of the credit curve, which we highlighted in our previous quarterly outlook.
We continue to seek out up-in-quality trades while avoiding weaker covenant language in lower-quality corporate bonds. We see value in fixed-to-float preferreds with higher back-end spreads, which should provide protection if the securities extend past the call date. This strategy allows us to participate in further spread performance over the short term, and keeps us disciplined into next year when economic, monetary, and fiscal policy changes should lead to more volatility but better relative-value opportunities.
Technicals remain highly positive, with a mere $554 billion year-to-date net issuance, a decline of 9.4 percent year over year, causing dealer inventories to fall back to the summer low.
Source: Federal Reserve, Guggenheim Investments. Data as of 10.7.2017.
—Jeffrey Carefoot, CFA, Senior Managing Director; Justin Takata, Director
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.
Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management. ©2017, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.
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