August 17, 2016
Risk appetite was strong through the second quarter despite lackluster global growth and Brexit fears. The primary investment-grade corporate bond market ended the quarter with $656 billion of gross issuance year to date, just $5 billion shy of last year’s first-half total, and keeping supply on track to equal 2015’s total volume. Lower global rates and quantitative easing have attracted investment-grade corporate inflows for every month this year. Although investment-grade corporate bond supply remains high by historical standards, this supply is offset by international demand due to lower rates globally. On the heels of the BOJ’s negative rate decision, we continued to see strong demand for both shortand long-term corporate bonds during the second quarter from investors in Asia. The ECB’s Corporate Sector Purchase Program of roughly €9 billion per month has prompted investor demand from yield-starved Europe as well.
U.S. investment-grade corporate bonds offer attractive yields relative to similarly rated corporate bonds in other countries. As a result, the primary market has seen strong demand from foreign investors as well as domestic investors. The result is robust monthly volumes in the second quarter of 2016, which has put the investment-grade corporate bond market on track to exceed 2015’s record issuance.
Source: J.P. Morgan. Data as of 6.30.2016.
Investment-grade corporate bonds delivered a strong second-quarter performance, with the Barclays Investment-Grade Corporate Bond index posting a positive 3.6 percent total return. This performance follows a 4 percent total return in the first quarter of this year. Unlike the first quarter, however, investment-grade corporate bonds saw better spread performance in the second quarter with a move tighter from 165 basis points to 156 basis points. The biggest moves were in energy and metals and mining, which saw average bond spreads tighten by 74 basis points and 62 basis points over the quarter, respectively. Higher commodity prices (particularly oil) have alleviated tail risks globally and attracted buyers of investment-grade credit in the energy and metals and mining sectors.
We expect investment-grade corporate bond spreads to remain stable through the next quarter. Although historically close to the lows for all-in yields on a spread basis, there is room to tighten further from here. At 156 basis points, the Barclays Investment-Grade Corporate Bond index is currently trading well wide of the historical low of 82 basis points and ex-recession average of 117 basis points.
Investment-grade corporate bond yields are near all-time lows, but spreads remain around 40 basis points wide of the historical ex-recession average of 117 basis points. With foreign demand expected to grow stronger and energy corporate bond valuations returning from distressed levels, we believe investment-grade corporate bond spreads are likely to trade through the historical average within the next six to 12 months.
Source: Barclays, Guggenheim Investments. Data as of 6.30.2016.
—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, Transparent Value Advisors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management.
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