Investment-Grade Corporate Bonds: Focus on Long Duration at Attractive Valuations

This Investment-Grade Corporate Bonds sector report is excerpted from the Fourth Quarter 2022 Fixed-Income Sector Views.

Consistent credit fundamentals and higher yields kept spreads unchanged for the investment-grade Bloomberg U.S. Corporate Bond Index (the IG Index) in the third quarter. Yields increased 107 basis points to 5.69 percent. For context, these yields are well above the highs seen during the COVID outbreak in 2020, and similar to the average yield during the Great Financial Crisis (GFC).

While third quarter corporate earnings results could be in line with expectations, weaker earnings and economic forecasts for the fourth quarter suggest credit fundamentals are susceptible to deterioration, especially with rising funding costs due to higher interest rates. This could pressure yields and spreads a bit higher, but we think the downside is more limited now.

Historically high all-in yields of the IG Index relative to the S&P 500 dividend yield have prompted buying of investment-grade corporate bonds by domestic insurance companies, pension funds, and traditional asset managers. At the same time, overseas buying by Asian investors in particular has slowed materially due to increases in hedging costs. Nevertheless, the market has drawn support from domestic investors attracted by higher yields and low dollar prices across the investment-grade corporate bond universe. The average dollar price in the IG Index closed the quarter at around $86, while the long duration portion closed at around $80. The historical mean for both is $96. This dollar price is attractive because it offers a buffer in the event of a negative credit event, and the discount will typically “pull to par” as it approaches maturity.

From a technical perspective, lower supply of new investment-grade bonds should support prices in the near term. Issuance of new supply (primary market issuance) was very choppy during the third quarter, with several lulls followed by days of overwhelming issuance. The third quarter set a record with over 50 days with zero issuance. When there is limited new issuance, coupon reinvestments and other regular inflows are forced to find opportunities in already-outstanding bonds (the secondary market), which supports secondary market prices and credit spreads. But in our experience, a very long period of low new issuance could negatively impact the information flow necessary for investors and traders to know where spreads should be.

Investment-grade bond yields appear attractive around these levels, but macroeconomic uncertainty will continue to create volatility for spreads. The market has been operating in an orderly fashion, but spreads will likely remain under pressure throughout the fourth quarter. We continue to favor long duration, low dollar price corporates for longer-term investment.

—By Justin Takata

Important Notices and Disclosures

This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.

This material contains opinions of the authors, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward-looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

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: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.

©2022, Guggenheim Partners, LLC. All Rights Reserved. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Guggenheim Partners, LLC.

GPIM 54967

VIDEOS AND PODCASTS

 

2022’s Upside: The Fed Has Put the Income Back in Fixed Income

Anne Walsh, Chief Investment Officer for Guggenheim Partners Investment Management, joined Asset TV to discuss macroeconomic conditions, risk, and relative value in the bond market.

×

2022’s Upside: The Fed Has Put the Income Back in Fixed Income

 

Macro Markets Podcast Episode 26: Mortgage-Backed Securities, Structured Credit, Market Liquidity

Karthik Narayanan, Head of Securitized for Guggenheim Investments, discusses value in the residential mortgage-backed securities market and other ABS sectors. Anne Walsh, Chief Investment Officer for Guggenheim Partners Investment Management, answers a listener question on liquidity. Jerry Cai, an economist in our Macroeconomic and Investment Research Group, brings the latest on the labor picture and an update on China.

×

Macro Markets Podcast: Episode #26