/institutional/perspectives/sector-views/ig-corporate-bonds-spreads-are-likely-to-tighten

Investment-Grade Corporate Bonds: Spreads Are Likely to Tighten Further

Technical indicators suggest that the rally we experienced in the fourth quarter has more room to run.

March 11, 2021


This Investment-Grade Corporate Bonds sector report is excerpted from the First Quarter 2021 Fixed-Income Outlook.

Investment-grade spreads have tightened to pre-COVID levels, driven largely by progress on the development of COVID vaccines, support from ongoing fiscal and monetary stimulus, and resolution of the political drama of the contentious presidential election. We witnessed an impressive rally in the fourth quarter as the Bloomberg Barclays U.S. Corporate Bond Index tightened to 96 basis points from 135 basis points on an option-adjusted spread (OAS) basis. Furthermore, technicals continue to lead the narrative for what we believe will result in further spread tightening in the first quarter of 2021.

Gross investment-grade primary issuance reached almost $1.8 trillion, and net issuance neared $1.0 trillion through the first three quarters of 2020. However, the fourth quarter saw virtually flat net issuance.

Investment-Grade Supply Is Expected to Decrease in 2021

Gross investment-grade primary issuance reached almost $1.8 trillion, and net issuance neared $1.0 trillion through the first three quarters of 2020. However, the fourth quarter saw virtually flat net issuance. We believe 2021 primary issuance will see a reversion to the mean closer to $1.2 trillion on a gross basis, providing further technical support to credit spreads.

Investment-Grade Supply Is Expected to Decrease in 2021

Source: Guggenheim Investments, J.P. Morgan. Data as of 1.31.2021.

We believe 2021 primary issuance will see a reversion to the mean closer to $1.2 trillion on a gross basis, providing further technical support to credit spreads. Foreign demand has continued to pick up at the margin as well, which contributed to nearly $55 billion of inflows to investment-grade corporate bond mutual funds in the fourth quarter.

As investment-grade corporate spreads currently sit near decade tights, and with much good news priced in, we expect credit spreads to trade in a narrow range.

Investment-Grade Corporate Bond Spreads Are Likely to Tighten Further

As investment-grade corporate spreads currently sit at near decade tights, and with much good news priced in, we expect credit spreads to trade in a narrow range. Barring a monetary policy misstep or a dramatic increase in interest rate volatility, the near-term path for spreads appears tighter.

Investment-Grade Corporate Bond Spreads Are Likely to Tighten Further

Source: Guggenheim Investments, Bloomberg. Data as of 1.26.2020. Shaded areas represent recession.

Barring a monetary policy misstep or a dramatic increase in interest rate volatility, the near-term path for spreads appears tighter. We believe the negative headwinds for both equities and credit, in the form of election unrest and aggressive COVID-19 lockdown policies, have subsided. That said, we expect to see bouts of volatility around COVID-19 mutation fears and vaccine efficacy and distribution. We anticipate risk selloffs to be shallow and present buying opportunities, with compression among the lower-rated cyclical credits relative to higher-rated, larger capital structure credits.

Looking past the first quarter, the market will need confirmation the economic recovery is taking shape in order to support performance. Orderly rate back-ups due to additional stimulus will be welcomed by the market but a prolonged or aggressive jump in yields could cause some rotation out of corporate bonds.

—Justin Takata, Managing 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, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.

©2021, 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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Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.