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Single Bs bomb as beta narrative shifts
June 2021 | Issue 235
Dan Alderson
Deputy editor
Few signalled themes in credit have died away as quickly as that of the outperformance of single B rated credit, which several firms proposed at the start of May but soon found crushed by a cocktail of worries around inflation, central bank policy, supply and high yield fund outflows.
“Single B names have been talked about as an opportunity,” says Alberto Gallo, head of macro credit at Algebris Investment, “but you have to be careful, as a large amount are vulnerable. There is the illusion of idiosyncratic risk, but in a down cycle they will also lose, as a lot of companies will have trouble without government support and low rates.”
On paper, single Bs looked a promising potential earner at the end of April, despite borrowers in this rating band dominating high yield issuance. With spreads generally outside the high yield market average — and double that of double Bs — several strategy desks saw them as a natural compression play. Both Bank of America and JP Morgan highlighted them among top picks.
“Many will have trouble without government support and low rates”
Alberto Gallo, Head of macro credit | Algebris Investment
But most spreads have shifted wider from the start of May, with only European triple Bs and US triple Cs improving across implied rating bands in iTraxx Crossover and CDX HY. Only a few successive bull days at the end of May saved the picture from becoming worse, although ironically the entry points now look better given slowing issuance.
In fairness to BofA, the bank did focus its recommendation on periphery, leisure, retail, services and sustainability-linked high yield credit, citing indications that the European market was deleveraging quicker than expected. JP Morgan noted May and June have historically been among the least profitable months for euro high yield.
Source: IHS Markit
BNP Paribas stands apart for having instead recommended buying double Bs while selling Bs. Head strategist Viktor Hjort noted double B bonds lagged single Bs throughout 2020 and were due to outperform because of factors including attractive valuations and a wave of rising stars.
European double Bs widened marginally on the month, but the US band performed worse.
Single Bs are a pure beta play, argues a PM at another fund manager, meaning that if equities fall single Bs will lose more than double Bs. “Yields aren’t anywhere near where they need to be to weather a soft period in stocks,” he says.
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Global credit funds & CLO's
June 2021 | Issue 235
Published in London & New York.
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