A tighter concentration of investment-grade corporate debt this year is forcing institutional investors to become more selective when seeking debt for their portfolios.
So far in 2016, investment-grade issuance is running 9% above 2015 levels. But 31% of the $230 billion in investment-grade corporate debt issued as of March 1 came from three companies: Apple Inc., Anheuser-Busch InBev SA/NV and Exxon Mobil Corp.
“Selection has become more important over the last year. The idea of blindly allocating to credit is no longer the case,” said Jeff Cucunato, managing director and head of U.S. investment-grade credit at BlackRock Inc., New York.
“For investors that have the ability to be providers of liquidity, this presents an opportunity,” he added.
According to Bryon J. Willy, a principal at Mercer LLC in Chicago, the issue for investors is that the volume composition has changed, with less block-trade volume and smaller trades. This means larger managers have been forced to split trades into smaller pieces.
“More recently issued bonds by large issuers are most likely to trade in block size, and therefore, are more liquid,” said Mr. Willy, noting this means a couple of things for managers.
The first, is that a buy-and-hold or buy-and-maintain portfolio will become less liquid through time as a result of bonds rolling down the maturity curve.
The second is that large managers with daily flows and/or higher liquidity needs will have to consistently switch into recently issued securities to remain more liquid, which implies incurring more transaction costs.
“Right now, the differential between liquid and illiquid securities has increased — this premium is generally correlated with credit market spread levels and volatility,” Mr. Willy added. “So this is an opportunity for managers willing to take on less liquid securities.”
J.R. Rieger, global head of fixed income at S&P Dow Jones Indices, New York, agreed that the securities from the bigger issuers of corporate debt have more liquidity.
“They enjoy better depth of liquidity than the smaller issuers and that's where the dichotomy in the market is,” Mr. Rieger said.