keeping up with 2021 credit market update - western asset · 2021. 2. 25. · -30-20-10 0 10 20 30...
TRANSCRIPT
1
Keeping Up With 2021–
Credit Market UpdateFebruary 25, 2021
Michael BuchananDeputy Chief Investment Officer
Robert AbadProduct Specialist
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0
500
1,000
1,500
2,000
2,500
Apr
20
May
20
Jun
20
Jul 2
0
Aug
20
Sep
20
Oct
20
Nov
20
Dec
20
Jan
21
Feb
21
Tho
usan
ds
Daily Tests
23 Feb 21: 1.18M
0
50
100
150
200
250
300
Apr
20
May
20
Jun
20
Jul 2
0
Aug
20
Sep
20
Oct
20
Nov
20
Dec
20
Jan
21
Feb
21
Tho
usan
ds
Daily Cases
23 Feb 21: 67,879
0
20
40
60
80
100
120
140
Apr
20
May
20
Jun
20
Jul 2
0
Aug
20
Sep
20
Oct
20
Nov
20
Dec
20
Jan
21
Feb
21
Tho
usan
ds
Currently Hospitalized
23 Feb 21: 55,058
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Apr
20
May
20
Jun
20
Jul 2
0
Aug
20
Sep
20
Oct
20
Nov
20
Dec
20
Jan
21
Feb
21
Daily Deaths
23 Feb 21: 2,196
Turning the Corner on the PandemicNationwide COVID-19 Metrics Since April 1, 2020: 7-Day Average Lines
Source: The COVID Tracking Project. As of 23 Feb 21
3
20,400
20,000
19,600
19,200
18,800
18,400
18,000
17,600
17,200
2015 2016 2017 2018 2019 2020 2021
Real GDP and Real Consumer Spending
2012
US
D (
billio
ns/y
ear)
Actual
Real GDP
2015-2019
GDP Trend
Source: Bureau of Economic Analysis. As of 31 Dec 20
Path Necessary
to Return to
Trend by 4Q21
(7.5% growth)
US Growth Expected to Bounce Back After a Tough 2020
Real GDP Trajectory
4
0
1000
2000
3000
4000
5000
6000
7000
2015 2016 2017 2018 2019 2020
Personal Saving
US
D (
billi
ons/
yr)
Source: Bureau of Economic Analysis. As of 31 Dec 20
Dec. Rate $2.38T,
$1.2T above trend
Consumer Fundamentals Have Improved Since the COVID-19 Shock
1700
1600
1500
1400
1300
1200
1100
2015 2016 2017 2018 2019 2020
Consumer Loans Issued by Banks
US
D (
billi
ons)
Source: Federal Reserve Board. As of 18 Jan 21
5
-0.3
2.54.7
7.35.2 5.5
8.1 8.19.6 8.6
4.82.5 2.4 2.0
3.90.9
-8.8
-1.9
0.7
-15
-10
-5
0
5
10
15
2Q16 1Q17 4Q17 3Q18 2Q19 1Q20 4Q20E
S&P 500 Revenue Growth (Year Over Year)
Source: S&P, Thomson Financial, Factset, Credit Suisse. As of 31 Dec 20
-1.7
4.79.0
15.49.6 7.9
12.7
26.125.428.2
17.1
2.8 3.8 1.1 2.9
-13.6
-30.7
-6.4
1.9
-50-40-30-20-10
010203040
2Q16 1Q17 4Q17 3Q18 2Q19 1Q20 4Q20E
S&P 500 EPS Growth (Year Over Year)
Source: S&P, Thomson Financial, Factset, Credit Suisse. As of 31 Dec 20
6.1
-6.6
3.7 3.4
-12.5-0.5
-10.3-3.0
-22.6-11.9
-41.7
-98.3
21.6 20.8 18.8
1.09.5 5.5 3.7
-1.8 -1.9-13.3
-37.3
-104.7-120
-100
-80
-60
-40
-20
0
20
40
MAT FIN TECH HC COMM CS S&P UTL CD RE IND ENE
Per
cent
S&P 500 4Q20 Expected EPS Growth Rates
01 Jan 21 Feb 2021
Source: Refinitiv. As of Feb 2021
Corporate Earnings Much Better Than Initial Expectations
6
1.94
0
2
4
6
8
10
12
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Yie
ld to
Wor
st (
%)
Bloomberg Barclays US Credit Index Yields
Source: Bloomberg Barclays. As of 23 Feb 21
Investment-Grade Credit Reaching New Milestones
Cycle of Local Tights Feb-97 Feb-07 Jun-14 Feb-18 Jan-20 Feb-21
Index OAS (bps) 56 82 97 85 93 88
Index Yield (%) 7.11% 5.64% 2.97% 3.54% 2.71% 1.93%
Average Credit Quality A+/A A/A- A/A- A-/BBB+ A-/BBB+ A-/BBB+
% BBB 28% 35% 43% 48% 50% 50%
Index Duration 6.2 6.3 7.0 7.6 8.0 8.5
Index Average Dollar Price (USD) 101.21 102.48 108.69 103.56 110.53 112.87
Median IG Gross Leverage 1.36x 1.60x 1.93x 2.30x 2.40x 2.40x*
T12M Excess Return Vol 0.40% 0.60% 2.20% 1.40% 3.20% 3.4%**
*Estimated YE2021 leverage returns to pre-COVID level
**Shows T6M Volatility for current
Source: Morgan Stanley Research, Bloomberg, FTSE Fixed Income.
7
0
10
20
30
40
50
60
70
80
90
1990 1994 1998 2002 2006 2010 2014 2018
Per
cent
Bloomberg Barclays US Credit Index Yields
Source: Bloomberg Barclays. As of 23 Feb 21
0
100
200
300
400
500
600
1990 1994 1998 2002 2006 2010 2014 2018
Blo
ombe
rg B
arcl
ays
US
Cre
dit I
ndex
OA
S (
bps)
Bloomberg Barclays US Credit Index Spreads
Source: Bloomberg Barclays. As of 23 Feb 21
Investment-Grade Credit: Historical Perspective
Option-Adjusted Spread as Percentage of Yield
IG Spreads Have Traded Below 100 bps for
Extended Periods in the Past
8
Bank Loan
Investment-GradeHigh-Yield
-20
0
20
40
60
80
100
120
140
160
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
US
D (
billi
ons)
Cumulative Retail Flows by Asset Class
Source: Morningstar. As of 31 Jan 21
Investment-Grade Credit Has Dominated Retail Credit Flows
9
-100
-50
0
50
100
150
200
2010 2012 2014 2016 2018 2020
OA
S D
iffer
ence
(bp
s)
Source: Citi Research, FTSE Index. As of 18 Feb 21
-5.50
-5.00
-4.50
-4.00
-3.50
-3.00
-2.50
-2.00
2010 2012 2014 2016 2018 2020
Dur
atio
n D
iffer
ence
(yr
s)Source: Citi Research, FTSE Index. As of 18 Feb 21
High-Yield Credit: “Carry Your Way to Greatness”
Spread Advantage of BB/B vs. Long Duration Duration Gap Between BB/B vs. Long Duration
10
0%
2%
4%
6%
8%
10%
12%
14%
16%
-36 -24 -12 0 12 24 36
LTM Default Rate in Past Cycles
1991 2002 2009 2017 2020
Source: Morgan Stanley Research, Moody'sNote: Shows Moodys' count-weighted speculative grade default rate.
High-Yield Credit: Improving Default Trends and Return Prospects
1.2%
-1.3%
4.0%
6.4%
-8%
-4%
0%
4%
8%
12%
Above Avg &Rising
Above Avg &Falling
Below Avg &Falling
Below Avg &Rising
US HY XS Fwd 12m Returns by Inflation Bucket
Source: Bloomberg, Morgan Stanley ResearchNote: We use excess returns from 1970 or whenever history begins. Blue dot shows median while blue bars show interquartile range.
High-Yield Outperforms When Inflation
Is Below Trend and Rising
11
High-Yield Credit: Spread as a Percentage of Overall Yield
Median: 165%
0%
500%
1000%
1500%
2000%
2500%
3000%
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Bloomberg Barclays US High-Yield Index Option-Adjusted Spread as a Percent of 5-Year Treasury Yield
Max = 2388%(31 Jul 2020)
Source: Bloomberg. As of 29 Jan 21
12
-15
-10
-5
0
5
10
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
US
D (
billi
ons)
Leveraged Loan Fund Flows
Source: J.P. Morgan. As of 04 Feb 21
-3%
-2%
-1%
0%
1%
2%
3%
4%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Rolling 3-Month Loan Flows as a Percent of Asset Class
Source: J.P. Morgan, S&P LCD. As of 31 Dec 20
Bank Loans: Strong Technicals Expected to Boost Demand
Emerging Markets, 4.6
Muni, 13.3
Mortgage, 3.6
Leveraged Loan, 1.5
High-Yield, 9.6
Investment-Grade, 67.4
Fund Shares by Asset Class (%)
Source: Citi Research, EPFR. As of 31 Dec 20
13
0
200
400
600
800
1,000
1,200F
eb 1
1
Feb
12
Feb
13
Feb
14
Feb
15
Feb
16
Feb
17
Feb
18
Feb
19
Feb
20
Feb
21
Bas
is P
oint
s
US CLO 2.0/3.0 New-Issue Spreads
AAA AA A BBB BB LL Index¹
¹S&P/LSTA Leveraged Loan IndexSource: BofA Global Research, S&P Global Market Intelligence, a division of S&P Global Inc. As of 19 Feb 21
CLO Tranche New-Issue Spreads
14
Structured Credit: CMBS Has Lagged the Broad Recovery
Sector YTD YoY Since Peak
CMBS AAA -0.7% 4.9% 4.3%
CMBS BBB- 5.4% -8.9% -9.4%
IG Corp -2.4% 4.0% 3.5%
HY Corp 1.3% 7.2% 7.2%
US Treasuries -2.5% 3.0% 2.3%
US Long Maturity Ts -8.8% 0.4% -1.4%
S&P 500 4.2% 17.4% 19.1%
Equity REITs 4.6% -7.7% -9.3%
Industrial 4.6% 7.9% 6.6%
Office 0.3% -27.8% -28.0%
Strips 19.3% -8.0% -9.9%
Malls 28.2% -16.7% -19.8%
Apartments 10.5% -12.8% -14.3%
Manufactured Housing -0.4% -10.3% -12.4%
Single Family Rental 2.6% 1.2% 2.2%
Healthcare 3.7% -11.6% -13.5%
Storage 3.1% 13.2% 10.2%
Triple Net 2.6% -8.9% -11.5%
Lodging 16.6% -5.8% -8.3%
Student Housing 1.3% -5.4% -7.1%
Data Center -3.7% 7.2% 4.2%
Infrastructure 1.0% -3.3% -4.0%
Source: Thomson Reuters, SNL Financial, Morgan Stanley Research. As of 19 Feb 21
15
A
BBB
BB
50
150
250
350
450
550
650
750
850
950
2017 2018 2019 2020
Bas
is P
oint
s
Emerging Markets OAS History
Source: Bloomberg Barclays. As of 29 Jan 21
EM A minus US A
EM BBB minus US BBB
0
20
40
60
80
100
120
140
160
180
200
2012 2013 2014 2015 2017 2018 2019 2020
EM USD Corporate Yields Are CurrentlyHigher Than US CorporateYields
Source: Bloomberg, J.P. Morgan. As of 31 Jan 21B
asis
Poi
nts
Emerging Markets Offer Attractive Outright and Relative Spread Opportunities
16
BBB CMBX
HY CDX
0
200
400
600
800
1000
1200
1400
Jan 18 Jul 18 Jan 19 Jul 19 Jan 20 Jul 20 Jan 21
Bas
is P
oint
s
Comparative Spreads
Source: Bloomberg, Markit, Morgan Stanley Research. As of 22 Feb 21
Relative Value: BBB CMBS Spreads Remain Wide Relative to HY
Comparative Spreads
17
25%
31%
20%
10%
8%
6%
15%
24%
28%
15%
10%9%
0%
5%
10%
15%
20%
25%
30%
35%
<250 bps 250bp – 350bp 350bp – 450bp 450bp – 550bp 550bp – 750bp >= 750bp
Per
cent
of U
nive
rse
Spread Buckets for High-Yield Bonds and Bank Loans
High-Yield Bonds
Bank Loans
Source: J.P. Morgan. As of 22 Feb 21
Relative Value: High-Yield vs. Bank Loans
18
US CLO AAA (left)
US CLO BB (right)
0
200
400
600
800
1000
1200
1400
1600
1800
2000
0
50
100
150
200
250
300
350
400
450
2012 2013 2014 2015 2016 2017 2018 2019 2020
Discount M
argin (bps)Dis
coun
t Mar
gin
(bps
)
US CLO Comparative Spreads
Source: J.P. Morgan. As of 22 Feb 21
US Credit (left)
US Mortgage-Backed Securities (right)
0
20
40
60
80
100
120
140
160
180
0
50
100
150
200
250
300
350
400
2019 2020
Option-A
djusted Spread (bps)
Opt
ion-
Adj
uste
d S
prea
d (b
ps)
US IG Looks Wide vs. US MBS
Source: Bloomberg Barclays. As of 22 Feb 21
Relative Value: CLO Tranches, IG and Agency Mortgages
19
Questions & Answers
20
Thank you.
21
Risk Disclosure
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