The use of relative value credit analytics is not new, but the importance of this methodology has come into sharper focus and has been the subject of increased investor attention over the last 12 months. According to a new whitepaper from Quantifi, a provider of integrated risk, analytics, and trading solutions, there are two main reasons why relative value credit strategy has become a hot topic in the last year. The first is an extraordinary surge of issuance seen in the bond market. The second is the extreme volatility within the credit sector in the face of COVID-19. Both these phenomena have created significant opportunities for realization of value, and although, by the time of writing, the markets have calmed down considerably from the turbulence seen 12 months earlier, the party is not over yet.
Record Bond Issuance
By the end of September 2020, US corporate bond issuance had already exceeded that of 2017, hitherto the busiest year yet seen in the debt markets. By the beginning of the fourth quarter, over $1.91trn had been issued in investment grade and non-investment grade debt. By the end of the year, that figure had swelled to $2.36trn, split between $1.95trn in the high-grade market and $414bn in the high yield market.
Dealogic calculates total global investment-grade corporate debt issuance to have been the equivalent of $2.94trn, $2.014trn of which was denominated in US dollars and $772bn in euros. This compares to total issuance of $2.455trn in 2019 and $2.501trn in 2017, so 2020 volumes represented an overall 20% increase over the previous year and no less than a 54% increase in dollar-denominated debt.
Bigger the Market, the More Opportunities
Issuance of this scale creates opportunities for investors simply because there are a lot more bonds out there. Perhaps more tellingly, there is value to be had due to dislocation. This is the second reason why eyes are increasingly focused upon relative value credit strategies.
The growth of electronic trading has probably contributed to the greater efficiency of credit markets, but only a relatively small proportion of credit products are traded online. According to the latest JP Morgan annual e-trading survey, released in February 2021, dealers anticipate that 20% of all credit trading will be conducted electronically by the end of this year. This compares with 75% for FX and 50% for rates.
The performance of the Bloomberg Barclays US Corporate Bond Index over the last year also suggests that there is room for growth. It significantly underperformed the equity markets over the past year with a broad market return of 6.3% compared to no less than 50% in the S&P 500. Indeed, the feeling that the equity markets are bumping against the ceiling has led to increased interest in credit markets from multi-strategy firms that normally focus upon equity markets. Meanwhile, traditional credit buyers scent an opportunity.
There are also now over 60 investment-grade corporate bonds ETFs, and the market was given a boost over a year ago when the Federal Reserve announced it will buy high-grade corporate bonds and ETFs as part of its stimulus program.
Analysis & Technology
To be able to spot the opportunities, investors need both adroit analysis and powerful digital technology at their disposal. They must be able to survey the entire credit landscape to isolate the potentially profitable dislocations and then execute trades quickly before they vanish. Risk managers also need state-of-the-art tools to always measure and report on portfolio risk.
For more information on the paper visit Quantifi