Relative yields on U.S. investment- grade corporate debt are poised to narrow after bond dealers curbed holdings and as the world’s largest economy avoids recession, according to JPMorgan Chase & Co.
Spreads may tighten 25 basis points, or 0.25 percentage point, to 140 basis points by the end of this year as investors increase allocations to investment-grade bond funds, JPMorgan analysts led by Eric Beinstein wrote in a Sept. 10 note to clients. Absolute yields on the debt may fall to 4 percent from 4.3 percent in September, he said.
“Spreads will grind tighter as supply falls short of demand and investors continue to see the economic environment as favorable” for increased allocation to investment-grade credit, the JPMorgan analysts said in the report, whose fixed-income research group was ranked first in Institutional Investor magazine’s poll of U.S. money managers.
JPMorgan raised its recommendation on the debt spreads to “overweight” from ”neutral” as third-quarter data supports a 1.5 percent growth forecast, signaling that while the U.S. economy is weaker than earlier in the year, a double dip into a second recession is unlikely, the report said.
The analysts are reversing a June recommendation that was spurred in part by concerns of a slowdown in Europe and the U.S., they said. An “overweight” recommendation typically means investors should own a greater percentage than is contained in their benchmark indexes.
Investors allocated $12.7 billion into investment-grade bond funds in August, the second-highest amount this year following March, when they deposited $12.8 billion, Beinstein wrote.
Investors have also been buying “a significant amount of bonds from dealers,” over the past 10 months, the analysts wrote, citing data from Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. This leaves dealers “lighter on risk, which is supportive of spreads,” they said.
Sales of investment-grade corporate bonds may accelerate, with companies issuing an additional $220 billion of the debt this year as “demand trends show no letup,” wrote Beinstein, who’s based in New York. Offerings may reach $650 million, compared with $670 million last year, he wrote.
Beinstein didn’t immediately return a phone call seeking additional comment on the report.
JPMorgan earlier estimated spreads would tighten to 150 basis points and issuance would reach $600 billion by the end of this year, according to the report.