Fixed Income
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Bonds
Long duration credit update for the second quarter of 2020
Greg Garrett
August 6, 2020
Having made a turn for the better in late March, investment-grade corporate bonds continued to recover from the violent price declines of the first quarter, stabilizing in early June at levels that reflected both optimism and concern.
The nearly $3 trillion expansion of the Federal Reserve balance sheet from early March until the end of June improved investor sentiment and fueled investor appetite for a record level of new issuance by investment-grade companies. For firms, this was a time to secure liquidity in preparation for an uncertain economic future. For investors, particularly those who were prepared for the volatility, it was a time to invest in many high-quality companies at attractive valuations. The rationale for purchasing investment-grade credit could be found not only in the policy support but also in economic data that reflected a bottoming of activity.
Investment-grade credit spreads narrowed by 122 basis points (bps) to close the second quarter at 150 bps on an option-adjusted basis. At these levels, investors are not being compensated for the potential economic risks associated with the COVID-19 pandemic. As a result, by the end of the quarter our portfolios were modestly underweight credit risk.
The Capital Group Long Duration Credit Composite rose in absolute terms during the quarter and outpaced the benchmark Bloomberg Barclays U.S. Long Credit Index. The excess return was entirely driven by issuer selection, including many of the portfolio’s long-term holdings in tobacco, pharmaceuticals and energy pipelines.
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