2019 U.S. Credit Halftime Preview
USD high yield and investment grade corporate bonds delivered strong year-to-date returns, with the iBoxx $ Liquid High Yield Index up 10.29% and the iBoxx $ Liquid Investment Grade Index up 11.28% as of June 20th, 2019. The rally in the Treasury curve drove fixed income performance as the Treasury 10-year rallied 65 basis points from 2.66% to 2.01%.
Figure1: USD HY & IG YTD return
In both HY and IG, the greater the duration the greater the reward, with each increment of longer maturity providing more return:
Figure2: IBOXHY return per maturity bucket
Figure3: BOXIG return per maturity bucket
In high yield, credit positioning was also an important performance driver. Being long the 5-year on-the-run CDX High Yield Index returned 8.44% YTD versus 3.37% from the CDX Investment Grade Index.
Figure4: CDX HY & IG YTD Total Return
Lower-rated HY credit buckets outperformed, with the CC-rated and C-rated indices returning 31.4% and 22.38%, respectively, on 1,224 and 454 basis point tightening. B and BB-rated bonds delivered near HY index-matching return of 10.54% and 10.05%, respectively, while the lowest CCC-rated bucket underperformed with an 8.95% return.
Figure 5: IBOXHY credit return
High yield saw little dispersion in sector returns except for Energy, which underperformed the HY Index by 2.55%.
Figure6: HY Sector YTD performance
Telcom drove YTD performance in investment grade, delivering 3.79% above the IG Index. The Telcom sector began the year with the second highest annual yield (5.12% vs Consumer Goods 5.14%) and second highest effective duration (10.15 years vs Utilities 11 years). Telcom's effective duration began the year over 2 years longer than Consumer Goods.
Figure7: IG Sector YTD performance
Verizon Communications Inc. and AT&T Inc. bonds had the great returns while also contributing the most to index return. VZ and AT&T have a combined $140.6bn of market value debt in the index. As a reference point, the highest returning Verizon and AT&T bonds were VZ 5.012% 8/21/2054 (ISIN: US92343VCM46) and T 5.70% 3/1/2057 (ISIN: US00206RDT68), which returned 25.55% and 22.04%, respectively.
Figure 8: VZ 5.012% 8/21/2054 vs T 5.70% 3/1/2057
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