Weekly Fixed Income Update | Lord Abbett
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WEEKLY FIXED INCOME UPDATE

For the week of August 16, 2021

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CHART OF THE WEEK: Potential Opportunity in High Yield Energy Sector

THE WEEK IN REVIEW

Investment-grade corporate bonds posted gains last week as credit spreads remained unchanged, while longer-term U.S. Treasury yields declined. The 10-Year U.S. Treasury ended the week at 1.28%. High yield bonds posted modest declines, with spreads widening by 8 basis points as uncertainty over the Delta variant’s impact on the economic recovery continued to increase, and the market absorbed another week with a large volume of new issue supply ahead of an expected late August slowdown. Consumer confidence, as measured by the University of Michigan’s survey of consumer sentiment, came in lower in the preliminary August data.

With the rise in health concerns once again given the Delta variant, reopening and consumer-oriented sectors are under greater scrutiny in the credit markets. However, we believe it’s also worth considering how management teams have adapted to the changed environment and how that could influence credit sector performance going forward. In this week’s Chart of the Week, we highlight the relative underperformance of the high yield energy sector, mapped against the spot price of crude oil. Specifically, note that the difference in spreads between the ICE BofA U.S. High Yield Energy Index and the ICE Bofa U.S. High Yield Constrained Index (spread differential) is back to levels from about 4 months ago. However, oil prices are reasonably higher since then, suggesting an opportunity.

We have been constructive on the energy space across credit mandates, and particularly so on high yield energy companies.  But the rebound in commodity prices is hardly the full story behind our positive stance. Fresh from second-quarter earnings season and related management guidance, we find that management teams are retaining high levels of capital spending discipline and balance sheet friendly behavior, with spending down nearly 40% versus 2017-2019 levels across the industry. Leverage levels have improved materially from peak levels in 2020, and at current spot prices, the vast majority of exploration and production companies are meaningfully free cashflow positive, providing an accelerant for further credit improvement and a rise back to investment grade status for many of 2020’s fallen angels. Indeed, our work suggests that short of oil prices falling below $50/bbl (barrel of crude), these supportive cashflow dynamics should remain in place.

Additionally, as a sector at the crossroads of Environment, Social, and Governance (ESG) concerns, we’ve been engaging with companies across the industry on their plans and the challenges they face, and how developments are reflected in valuations. The degree of reporting, goals, and achievements related to ESG vary across issuers (particularly by company size). But, the industry’s ESG awareness has never been greater, with a gradual reduction in Scope 1-3 emissions by many of the participants we engage with, as carbon capture, cleaner power sources, and operational improvements all notable efforts to address environmental impacts in the industry. 

THE WEEK AHEAD

Tuesday
U.S. Retail Sales
U.S. Redbook
Industrial Production
Federal Reserve Chairman Speaks

Wednesday
U.S. Housing Starts & Permits
EIA Petroleum Status Report
Federal Open Market Committee Minutes

Thursday
U.S. Jobless Claims
Philadelphia Fed Manufacturing
U.S. Leading Indicators
EIA Natural Gas Report

Friday
Baker Hughes Rig Count





   

Index Returns

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1 Week YTD 1-YR 3-YR 5-YR
U.S. Aggregate -0.42 -0.92 -1.29 5.51 3.15
IG Corporates -0.61 -0.61 0.10 7.31 4.65
HY Corporates -0.18 3.88 9.96 6.68 6.67
Bank Loans 0.03 3.51 9.25 4.05 4.74
IG Corporates 1-3 Year -0.07 0.46 1.34 3.72 2.69
Global Aggregate -0.47 -2.38 0.04 4.69 2.48





   
   
      
      

TREASURY RATES

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Latest 1-YR Low 1-YR High 1-WK Change YTD Change 1-YR Change
2 Year 0.21 0.10 0.27 0 9 5
5 Year 0.77 0.24 0.94 1 41 46
10 Year 1.28 0.63 1.75 -2 36 57
30 Year 1.93 1.34 2.46 -2 28 52





   
   
      
      

CREDIT SPREADS

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Latest 1-YR Low 1-YR High 1-WK Change YTD Change 1-YR Change
IG Corporates 88 80 140 0 -8 -38
HY Corporates 309 262 537 8 -51 -177
EM Aggregate 289 263 362 -1 8 -63
CMBS 61 54 116 -1 -20 -55
MBS 33 7 69 1 -6 -20
ABS 26 22 54 -1 -7 -28





   
      
      

Other Indicators

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Latest 1-WK Change YTD Change 1-YR Change
S&P GSCI 524.74 2.41 115.29 172.70
Crude Oil - WTI ($) 68.44 0.16 19.92 26.20
5-Yr Breakeven Inflation Rate (%) 2.58 0.02 0.61 1.01

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