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USD investment grade corporate bonds rallied on Monday following
the Fed's announcement of their emergency action to support
financial markets and the economy during the coronavirus pandemic.
The iBoxx $ Liquid Investment Grade Index (IBOXIG) returned 1.41%
for the day; within IBOXIG, AAA-rated debt, Telcom issuers and long
duration had the largest reaction to the announcement. Despite the
Fed reaction rally, the IG index has a -15.66% return so far in
March.
AAA-rated corporate debt returned 4.18% on Monday, while
returning -8.95% MTD. Telcom names returned 3.45% Monday, versus
-16.03% in March. Corporate bonds in IBOXIG with 10 years or more
to maturity returned 3.31%, though have lost 20.51% MTD.
Investment grade Energy issuers continued losses, the only
sector in the red on Monday, losing 0.81%. Energy has also been the
loss leader for the month, returning -25.63% MTD. Nine issuers in
the Energy sector have seen the value of their bonds decline by
more than 40% MTD. While some Energy sector issuers have
underperformed over emergent credit risks, the sector also contains
some of the best performing credits. Three IG Energy issuers have
seen their bonds decline by less than 10% MTD; apart from Energy,
only 67 other issuers' bonds have declined by less than 10%, 264
issuers fell further MTD.
As IG credits rallied, the CDX NA IG index tightened sharply to
125.8bps, reversing the index move from Wednesday to Friday of last
week. While the reaction was notable, context is important: the
index reached a post-2009 wide on Friday and remains 59bps wider
than the end of February. Zooming in on the constituents, 88 single
name contracts wider than Friday, 70% of all constituents.
Conclusion:
Investment Grade credits reacted to the Fed announcement, but
the relief rally was not consistent across IG issuers and sectors.
Many issuers rated investment grade currently face unforeseen
stress related to some combination of the COVID-19 economic
slowdown and the oil price war. The early going on Tuesday suggests
the IG credit rally is extending to a second day, with the CDX IG
further tightening to 103bps as of 10 am, with 80% of issuers also
tighter day over day.
Posted 24 March 2020 by Nicholas Godec, CFA, Index Product Manager, Tradable Indices and
Sam Pierson, Director of Securities Finance, IHS Markit
