Corporate bonds

Goldman says investors should look to debt securitized from corporate bonds

(Bloomberg) — Rising inflation in the United States could end up being much better for consumers than for businesses, so investors should shift away from corporate bonds and into asset-backed securities. assets and other securitized debt, according to Goldman Sachs Group Inc. strategists.

Supply chain disruptions will likely limit corporate profits next year, which could hurt corporate debt, while pushing up house and car prices, which will favor asset-backed securities . Meanwhile, the wage inflation pressure that many companies are seeing will weigh on corporate profits while helping consumers, wrote Goldman Sachs strategists led by Marty Young and Lotfi Karoui.

Additionally, valuations look better for securitized bonds than for corporate bonds on a historical basis, the strategists wrote. For example, investment grade corporate bond spreads are in their fifth percentile for their tightening over the past five years, while AAA secured loan bonds are at their 14th percentile.

“The macro setup appears to be more favorable to securitized credit than corporate credit,” Goldman Sachs strategists wrote.

Goldman economists expect the unemployment rate to fall to 3.5% by the fourth quarter of 2022 and U.S. wage growth to reach 4% annually, with even stronger growth for the lowest paid workers. This will likely eat into corporate earnings, but be a tailwind for any type of ABS related to consumer payments, including autos, student loans, credit cards, residential mortgages and asset-backed securities. consumer loans, the strategists wrote.

Similarly, supply chain disruptions that have limited production volumes and profits for automakers and homebuilders have, at the same time, helped push up prices for used vehicles and homes. , which were up 38% and 20% year-over-year, respectively, the strategists said.

Automatic ABS loss rates are currently at multi-decade lows, in part reflecting record recovery rates on repossessions, the strategists wrote. Even assets backed by business-related assets, such as equipment ABS backed by loans and leases for office, manufacturing and agricultural machinery, and container ABS backed by shipping container leases, can benefit from inflationary pressures caused by supply chain challenges.

“Securitization products have historically offered diversification benefits over corporate credit,” the strategists wrote. “While diversification reasons alone are sufficient, in our view, to justify allocation to securitized sectors at present, relative value considerations also support a rotation from corporate credit to structured credit given current valuations.”

Relative value

Securitized debt had a year of record sales, with supply records after the 2008 financial crisis already set in most sectors, including ABS and CMBS. Sales of secured loan bonds, already at an all-time high for the year, look set to pick up speed by the end of the year.

Many parts of the securitization market, such as secured loan bonds and some student loan ABS, are floating rate, which is attractive in a time when rates are expected to rise.

“Securitized debt is attractive relative to short-term corporate debt, both on a spread and yield basis,” said Daniel Lucey, senior portfolio manager who invests in securitized credit at SLC Management. “CLOs, for example, are a great structure in a rising rate environment. We are overweight CLOs, especially single A tranches, throughout our portfolios. »

Relative Value: Agency MBS

  • Goldman Sachs Asset Management moved from a neutral to an underweight position in agency MBS, according to its latest weekly fixed income report.
  • Analysts expect the relatively stable supply accompanied by $5 billion monthly cuts in Fed purchases of MBS to be a headwind for the sector
  • In addition, the sector’s recent outperformance in a volatile rate environment prompted GSAM to take the decision to resume an underweight position.

Quotable

“There has been a bit of neglect in some stable ABS sectors, including recently issued auto and subprime student loans,” said Dave Goodson, head of securitized credit at Voya Investment Management, speaking about the pricing of the new offerings. “Issuer prioritization is starting to reappear.”

And after

ABS offers in the queue include Oak Street (triple net lease ABS), Capital One (credit card) and FirstKey (single family rental)

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