/institutional/perspectives/sector-views/investment-grade-corporate-bonds-signs-of-life

Investment-Grade Corporate Bonds: Signs of Life After Worst First Half in History

Continued rate volatility due to Fed policy and economic data will provide entry points throughout the quarter.

August 02, 2022


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

The investment-grade debt markets continued to struggle in the second quarter, as volatility in rates and equities, coupled with recessionary fears and uncertainty around Fed monetary policy, remained heightened. Technicals such as fund flows and overseas buying started to deteriorate, but the good news is that fundamentals remained positive.

Investment-grade corporate credit spreads continued to widen in the second quarter, which crystalized the worst half performance for investment-grade credit in history. Over the quarter, the Bloomberg U.S. Investment-Grade Corporate Bond Index widened by 40 basis points to 155 basis points, resulting in -7.26 percent total return and -2.24 percent in excess return. This brought the total return performance for the first half of the year to -14.19 percent.

Investment-grade weekly fund flows were negative every week in the second quarter. We would expect these outflows to continue throughout the third quarter, albeit at a declining rate. Overseas buyers, both euro and yen, experienced a dramatic increase in hedging costs, which resulted in muted demand for corporate bonds. These deteriorating technicals put outsized pressure on the intermediate credit curve, while support for longer duration remained strong.

Corporate bond liquidity also struggled in the first half. Year-to-date cash volumes were down 1 percent while derivative/exchange-traded fund (ETF) volumes were up 37 percent year over year as of June 30. Derivatives and ETFs tend to be used for more macro hedging, while cash trading typically addresses fundamental concerns. The dichotomy in these volumes highlights investors’ concerns over the macro backdrop versus the micro/fundamental backdrop.

Continued rate volatility due to Fed policy and economic data will provide entry points throughout the quarter. The 10/30s credit curves flattened over the second quarter due to rising Treasury yields and strong buying from investment companies, pension funds, and other institutional investors. We believe this trend will continue in the third quarter, with a focus on long duration, low-dollar price corporate bonds. With banks maintaining strong capital ratios, the bank preferred market looks historically attractive as well. As rate volatility subsides, we believe that the preferred market should start to see positive inflows and outperform.

Dollar Price Corporate Bonds Will Likely Attract Investors

Dollar Price Corporate Bonds Will Likely Attract Investors

Source: Guggenheim Investments, Credit Suisse, BAML, Bloomberg, ICE BofA. Data as of 6.30.2022.

—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 Fund Management (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 53593


FEATURED PERSPECTIVES

November 21, 2022

A Strong Credit Market Shapes the Default Outlook

The stress in this credit cycle is driven by unforgiving high interest rates.

November 10, 2022

Fourth Quarter 2022 Fixed-Income Sector Views

Market and value updates by sector.

November 04, 2022

The Jobs Data Trend Is Duration’s Friend

October jobs data suggests a cooling labor market.


VIDEOS AND PODCASTS

Fed Day: The Argument for 100 Basis Points 

Fed Day: The Argument for 100 Basis Points

Scott Minerd, Guggenheim Partners Global CIO and Chairman of Guggenheim Investments, joins Bloomberg TV on Fed Day.

Macro Markets Podcast 

Macro Markets Podcast Episode 25: Fixed-Income Pain Giving Way to Opportunity

Anne Walsh, Chief Investment Officer for Fixed Income, on the economic and credit cycle, and on risk and opportunity across the fixed-income landscape.







© Guggenheim Investments. All rights reserved.

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 Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.