Man Group: Sector and credit specifics now key for corporate bond investors amid elevated supply

Financial data

Sector- and credit-specific bond selection will become increasingly important for investors amid a surging wave of new issuance, as companies look to raise more money to combat the coronavirus fall-out, according to managers at London-listed global hedge fund giant Man Group, who suggested government bonds could prove “an attractive alternative.”

Corporate bond issuance has far outweighed the traditional muted summer volumes lately, with US gross investment grade corporate bond issuance reaching USD440 billion between June and August - some 80 per cent higher than the USD240 billion 10-year average.

In a commentary on Tuesday morning (22 Sep), Man GLG - the long-running discretionary hedge fund management unit of Man Group – gauged the impact of elevated supply in markets.

It noted that new issue premiums have moved from flat to slightly negative, with corporate spreads significantly tightening against a backdrop of “record 21 straight weeks of inflows”.

In contrast, across the Atlantic, euro-denominated investment grade issuance has been much more in line with seasonal norms. Spreads have outperformed during the summer rally aided by an EU corporate bond buying programme “equipped with more firepower” than the Federal Reserve’s Secondary Market Corporate Credit Facility as a percentage of total market size.

The note, written by Ed Cole, Man GLG’s managing director for equities, and portfolio managers Craig Veysey and Francois Kotze, suggested demand for yield from global bond investors has grown despite valuations being “comparatively less attractive” than they were in March.

“Corporate issuance is likely to remain robust in the short term,” said Man GLG, which manages a range of strategies spanning European and global equity, event driven and multi-strategy credit. “Consequently, bond selection by sector- and credit-specific situation is now much more important.”

Meanwhile, elevated issuance coupled with current yield levels will be a hurdle for the performance of longer-duration government bonds, though this sector can expect potential periods of strength in the near term.

“Central banks can offset the additional supply and economic weakness through increasing the scale of quantitative easing programmes,” Man GLG added. “With credits spreads now trading tighter, government bonds may prove to be an attractive alternative again for more conservative investors.”