Investment-Grade Corporate Bonds: Technicals Should Remain Supportive

Foreign demand is likely to drive spreads tighter despite healthy supply.

May 18, 2017


This Investment-Grade Corporate Bonds sector report is excerpted from the Second Quarter 2017 Fixed-Income Outlook.

First-quarter corporate bond supply of $372 billion was the largest quarterly gross issuance on record, beating the prior peak of $339 billion in the second quarter of 2015. This high watermark in gross issuance, however, was offset by some important technical items. While gross issuance rose by 10 percent in the first quarter, year-over-year net issuance over the same period was virtually flat. Furthermore, M&A-related issuance ended the first quarter at only $29 billion, the lowest volume since 2014, and while a forward calendar of $170 billion appears promising, $50 billion of that is due to megadeal mergers between AT&T and Time Warner, and British American Tobacco and Reynolds American. Demand has not let up for mutual funds, which, according to Lipper, have seen 14 consecutive weeks of inflows, and buying programs from Asian investors continue to blanket the corporate bond curve from the front end to the long end. We have seen some intermittent selling with moves in currency hedging, but foreign net bias favors investment-grade corporates, which threatens to drive spreads tighter. Therefore, the strong investment-grade corporate bond technical backdrop is likely to remain intact.

Investment-Grade Corporate Bond Quarterly Gross Issuance Sets Record

First-quarter corporate bond supply of $372 billion was the largest quarterly gross issuance on record, beating the prior peak of $339 billion in the second quarter of 2015. Meanwhile, net issuance is essentially flat on a year-over-year basis.

Investment-Grade Corporate Bond Quarterly Gross Issuance Sets Record

Source: J.P. Morgan, Guggenheim Investments. Data as of 3.31.2017.

Investment-grade corporate bond spreads continued their march tighter over the first quarter, albeit at a slower rate. The Barclays Investment-Grade Bond index delivered a 1.22 percent total return during the first quarter. Spreads tightened by 5 basis points quarter over quarter to 118 basis points. The continued recovery in commodities was evident in metals and mining spreads, which tightened by 17 basis points to 148 basis points. Although crude oil prices traded well below the highs of the year, we continued to see industries such as refining and midstream (i.e., petroleum transportation, storage, and marketing) tighten by 21 basis points and 11 basis points, respectively.

Going forward, geopolitics and domestic policy will likely create some risk of widening in investment-grade corporate spreads. The positive technical landscape, however, should provide a backstop to any significant spread widening, and domestic banks at the preferred level and energy still look attractive on backups. We would avoid retailers, especially traditional retailers, which are in the midst of a secular decline and will likely continue to face headwinds.

Investment-Grade Corporate Bond Mutual Funds Continue to Gather Assets

Demand has not let up for mutual funds, which, according to Lipper, have seen 14 consecutive weeks of inflows, and buying programs from Asian investors continue to blanket the corporate bond curve from the front end to the long end. Foreign net bias favors investment-grade corporates, which threatens to drive spreads tighter.

Investment-Grade Corporate Bond Mutual Funds Continue to Gather Assets

Source: Investment Company Institute, Guggenheim Investments. Data as of 3.29.2017. Data reflects cumulative net mutual fund flows since February 2016.

—Jeffrey Carefoot, CFA, Senior Managing Director; Justin Takata, Director

 
Important Notices and Disclosures

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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