May 18, 2017
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.
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.
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.
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.
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
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