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Euro BBBs vs. BBs: BBs Looking Good?
Winnie Cisar – Global Head of Strategy
Zachary Griffiths, CFA – Senior Analyst - U.S. Strategy
Sahil Arora – Analyst - European Strategy
EXECUTIVE SUMMARY
- So far in 2023, Euro HY has handily outperformed the IG market, posting total return of +3.6% (versus +1.3% for IG) and excess return of +3.2% (versus +1.0% for IG). Given the relative performance, investors are considering whether the move down from BBB to BB-rated credit still offers sufficient compensation for additional risk.
- In this note we analyse the historical performance of both rating segments with a focus on the differential between the two.
RELATIVE VALUE
Since the beginning of the year, spread tightening in HY has led us to reassess valuations within the crossover space. As of 26/05, BBBs have delivered excess returns of +1.3% versus +2.9% for BBs, with BBs also outperforming on a total return basis (+3.4% versus +1.8%). Given the relative outperformance, investors are considering whether the move to BBs from BBBs still offers sufficient compensation for additional risk. In this note we attempt to contextualize current valuations and the composition of the BBB and BB indices.
BBB VS. BB RELATIVE VALUE UPDATE
To start, we compare the spread pickup between BBB and BB-rated credit. Currently, the differential between the two segments is 147 bp with BBBs trading at 195 bp and BBs at 342 bp. Since the end of 2022, the differential has compressed -23 bp from 170 bp. From a historical perspective, the OAS pickup between BBBs and BBs is smaller than the post-GFC median (159 bp) and trades in line with the 5-year median (147 bp). Since the end of 2022, relative compression has been driven by BB spread tightening of -30 bp YTD versus -7 bp of tightening for BBBs. The BBB vs. BB spread differential hit a recent wide in early July 2022 at 285 bp before tightening to a recent trough of 125 bp in early March ’23. Euro credit markets have been consistently risk-on over the past month with HY outperforming IG. At the beginning of May, the OAS differential between BBBs and BBs stood at 172 bp having since tightened -25 bp; though inevitably spread change has diverged across sectors.
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