August 22, 2019
Investment-grade corporate spreads experienced another strong quarter of performance despite heightened trade war fears and increased geopolitical tensions. The technical backdrop of low supply and continued inflows, coupled with accommodative shifts in global monetary policy, remain the drivers of the strong corporate bond market.
The underlying technical environment remains robust. Gross and net issuance continue to slide into negative territory with gross issuance down 8.6 percent and net issuance down 29.6 percent year to date. Healthy investment-grade fund inflows to the tune of $70 billion over the last six months resulted in steady net buying of credit. Furthermore, with a record $15 trillion in global debt yielding below zero, and over $1 trillion of negative-yielding corporate debt, positive-yielding U.S. dollar-denominated credit should remain attractive to domestic and foreign investors alike. Additionally, the European Central Bank continues to make overtures of monetary easing, which may include restarting its corporate bond purchasing program.
Healthy investment-grade fund inflows to the tune of $70 billion over the last six months resulted in steady net buying of credit.
Source: Guggenheim Investments, Investment Company Institute. Data as of 7.31.2019. June and July based on estimated weekly fund flows.
With a record $15 trillion in global debt yielding below zero, and over $1 trillion of negative-yielding corporate debt, positive-yielding U.S. dollar-denominated credit should remain attractive to domestic and foreign investors alike.
Source: Guggenheim Investments, Bloomberg. Data as of 8.9.2019.
The Fed’s pivot from rate hikes to rate cuts created additional tailwinds for risk assets, with the lowest-rated investment-grade sector, BBB, benefitting most. The market’s concerns about over-levered BBB corporates in the fourth quarter have eased in anticipation of Fed rate cuts and a general risk-on tone. Additionally, some of the larger M&A names over the past two years—such as Comcast, AT&T, and Keurig Dr. Pepper—have continued to hit deleveraging targets.
Going into the third quarter, the market has been largely supportive of further spread compression in investment-grade corporates given the strong technical and generally accommodative monetary policy, but we caution that with year-to-date total return of around 9 percent, the upside may be limited. September and October in particular are slated to experience myriad pivotal macro events including trade war meetings and a potential no-deal Brexit resolution. Given the extraordinary year-to-date performance, combined with the liquidity fire drill we experienced in the fourth quarter of last year, some amount of risk reduction by asset managers and dealers should be expected. A prolonged bout of volatility and modest outflows could create a collapse in liquidity. We do not believe long-term investors are being compensated for risk given where we are in the credit cycle.
—Jeffrey Carefoot, CFA, Senior Managing Director; Justin Takata, Managing 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, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.
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