The key themes that drove returns in the second quarter continued through the third quarter. Robust issuance, totaling $323 billion in the third quarter, was absorbed by domestic and foreign investors hungry for yield. This technical backdrop has driven yields to unattractive levels. Fixed-rate primary market bonds priced at average yields of only 2.9 percent in the third quarter, despite maturities averaging more than 12 years, making it difficult to find compelling value. There is little indication that demand will ease in the near term as global yields anchor those in the U.S.: euro-denominated investment-grade corporate bond yields are a full 220 basis points lower than U.S. investment-grade corporates. We are watching hedging costs closely as we assess the potential for foreign demand to wane. For European and Japanese investors, hedging the U.S. dollar would eliminate over half of the excess yield over their respective local bonds, but this cost has not deterred demand for now. The ratio between foreign purchases and new issuance volume through July 2016 is at post-crisis highs.
The Barclays Investment-Grade Corporate Bond index delivered a 1.4 percent total return during the third quarter, its third consecutive quarter of positive returns. Spreads tightened by 18 basis points quarter over quarter to 138 basis points, with the biggest moves once again stemming from spreads tightening in energy and basic materials. Higher commodity prices have attracted buyers in both sectors, but the opportunity in commodity credit is almost over. Spreads in energy and materials are at their tightest in over a year.
With our Macroeconomic Research team estimating that the next recession remains two to three years away, we believe the rally in the investment-grade market is not over, and we expect to see more spread compression. In the near term, we will be looking to sell into strength and buy on weakness. Episodes of high volatility may yield opportunities that do not exist in a market that is seeing bonds priced inside of 3 percent yields and secondary bonds trading at significant premiums to par. We will focus in the coming months on higher quality and timely relative-value opportunities.
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.
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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 Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, Transparent Value Advisors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim").
Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
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*Guggenheim Investments total asset figure is as of 09.30.2016. The assets include leverage of $10.7bn for assets under management and $0.5bn for assets for which we provide administrative services.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"), which includes Security Investors, LLC ("SI"), Guggenheim Funds Investment Advisors, LLC, ("GFIA") and Guggenheim Partners Investment Management ("GPIM") the investment advisers to the referenced funds. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.
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