Credit markets have continued their stellar performance, particularly across the high-grade spectrum. US corporate bonds have also benefited from Fed buying. The Fed has reportedly established its own index of bonds, which are deemed more speculative, with just over 40% in high-grade paper with the remaining in medium-lower grade issues. With a tilt towards tech and consumer issuers, the Fed has been purchasing the likes of Microsoft and Apple, a move which has been questioned by many as these companies don’t appear to need such support from the central bank. Nonetheless, despite the Fed limiting its bond purchases to maturities within 5 years, Microsoft and Apple longer-end issues have enjoyed the underlying support and as such have broadly rallied to all-time highs.
An example of the former could be the 4.1% 2037s issue, which has rallied just under 30 points from the March lows. In other words, the Microsoft bond has tightened 200bps to a yield of 1.62%. Rated AAA/AA+ the bond continues to offer sufficient risk-adjusted return and yield of ~7.15% and over 3 notches of credit cushion. Apple 3.85% 2043s have also gained over 31 points since the Covid-19 induced sell-off in March, and are up 19 points so far this year, trading at all-time highs. These Aa1/AA+ rated bonds remain attractive trading at a spread of just over 100bps over USTs, which similarly rated bonds with the same duration are, on average, trading around 50bps over. Our proprietary Relative Value Model therefore calculated over 3 notches of credit cushion and an attractive risk-adjusted return and yield of ~11% if the bond were to move to “fair value”.
Being unconstrained by benchmarks, and instead having a total return focus to bonds from “wealthy” nations, allows us to cherry pick bonds which are mispriced, thus “cheap”, and avoid investments in the most indebted nations in the world.