Investors Should Buy High-Rated Junk Bonds as Economy Slows, JPMorgan Says

Investors should buy BB and B rated U.S. corporate bonds amid lower inflation and interest rates and slowing economic growth, JPMorgan Chase & Co. analysts said.

The default rate for high-yield, high-risk securities will be 2 percent through the end of 2011, analysts led by Peter Acciavatti wrote July 9 in a research report. The U.S. economy will grow 3.1 percent this year and 3 percent in 2011, JPMorgan predicted.

“Positive growth but growth not powerful enough to produce inflation and higher interest rates is a Goldilocks scenario for high-yield,” the analysts wrote.

High-yield, or junk, debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s. In S&P’s ratings system, the first six levels below investment grade range from BB+ to B-.

The extra yield investors demand to own junk bonds instead of Treasuries will tighten to 525 basis points by the end of the year, the analysts wrote. Spreads narrowed 10 basis points on July 9 to 688 basis points, the third straight decline and the biggest drop since June 21, according to Bank of America Merrill Lynch index data.

Spreads imply a default rate of 5.9 percent, nearly triple what the analysts forecast. Acciavatti couldn’t be reached for comment on the report because he was traveling.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.