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Long duration credit update for the second quarter of 2020
Greg Garrett
Fixed Income Investment Director

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.


Line chart representing the option-adjusted spread and yield to worst calculated for the Bloomberg Barclays Long U.S. Corporate Index, as well as 10-year and 30-year U.S. Treasury yields. Data from June 28, 2019, to June 30, 2020. The chart shows that the option-adjusted spread and yield to worst declined significantly after peaking in late March. During the same period, Treasury yields fell. Sources: Barclays, Bloomberg Index Services Ltd., Refinitiv Datastream

 


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.  



Greg Garrett is Investment Director for credit and long duration strategies at Capital Group. He has 32 years of investment industry experience and has been with Capital Group for 18 years. He holds a bachelor’s degree in finance from the University of Arizona.


This investment strategy and/or related material is designed for use solely by Qualified Purchasers, institutional investors and consultants.

 

Bloomberg® is a trademark of Bloomberg Finance L.P. (collectively with its affiliates, “Bloomberg”). Barclays® is a trademark of BarclaysBank Plc (collectively with its affiliates, “Barclays”), used under license. Neither Bloomberg nor Barclays approves or endorses this material, guarantees the accuracy or completeness of any information herein and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

 

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