meshaphoto
By Tyler Gile
We believe spreads on crossover BBB/BB rated bonds offer historically attractive relative value for high yield investors.
Investors across the fixed income landscape have experienced a volatile year, but we believe attractive opportunities have arisen within that volatility. In particular, the crossover BBB/BB market has recently become a bright spot in the hunt for relative value.
The BBB/BB market represents a line of demarcation between the investment grade and high yield investor bases where more constrained mandates prohibit the ability to cross over. The underlying issuers, however, do not share this same constraint and frequently operate across both markets. This dynamic often creates dislocation between the two rating cohorts, which became apparent in the second half of this year.
Since June, BB spreads have tightened over 100 basis points as high yield investors have looked to move up the rating spectrum whereas BBB spreads have remained unchanged as investors have gravitated away from the lower-quality portion of their market. This caused the spread differential between BBs and BBBs to fall in October to the bottom decile of observations going back to 2020, implying that BBs trade tight to BBBs. In fact, approximately 14% of investment grade bonds traded in the same spread range as high yield, which is the highest level observed in the past five years. Even more staggering, in our opinion, is that this all has occurred in a year with a record number of rising stars migrating from BB to BBB, essentially removing the tightest cohort in the high yield market.
This dislocation has been broad-based but specific areas of the market have been particularly affected. First, looking at issuers with outstanding bonds that span both markets, the median spread differential between the BB and BBB tranches tightened from roughly 160bps in June to only 60bps in October. The median dollar price for BB bonds in this category stood at about 90 versus 88 for BBB bonds, implying increased convexity opportunities in the investment grade portions of these capital structures. On a broader sector basis, the compression has been focused primarily in the energy, utilities and healthcare sectors, where BBB spreads have remained flat but BBs have tightened by about 70bps.
In our view, the compression of relative BBB/BB spreads has given investors the opportunity to upgrade their existing crossover exposure with historically limited spread give-up. These relationships can change quickly, which benefits flexible mandates capable of addressing market dislocations on a timely basis.
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investor’s individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. The firm, its employees and advisory accounts may hold positions of any companies discussed. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.
Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.
This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.
The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.
Certain products and services may not be available in all jurisdictions or to all client types. The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Neuberger Berman Group LLC (and its affiliates, “Neuberger Berman”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement investor, contact your financial advisor or other non-Neuberger Berman fiduciary about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances.
This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.
Neuberger Berman strives to provide individuals with disabilities equal access to our services, including through an accessible website. If you have questions, comments, or encounter any difficulty using our site, please call us at 212 476 9000.
© 2009-2022 Neuberger Berman Group LLC. All rights reserved.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Be the first to comment