The Zhitong Finance App learned that J.P. Morgan strategists expect US investment-grade corporate bonds to outperform US treasury bonds in the fourth quarter. The bank believes that as the rate of debt issuance by large technology companies slows down, corporate profits remain strong, and interest rate fluctuations stabilize, the supply and demand environment for investment-grade corporate bonds is expected to improve, and credit spreads may narrow further.
According to a report released by J.P. Morgan Chase on Friday, the bank expects that the spread of its JULI index, which tracks US investment-grade corporate bonds, compared to US Treasury bonds, will narrow to 0.85 percentage points from 0.96 percentage points last Friday. Converted to the Bloomberg US corporate bond index, it is equivalent to the expected credit spread falling to about 0.73 percentage points from 0.82 percentage points last Friday.
J.P. Morgan strategists, led by Nathaniel Rosenbaum, have listed a series of favorable factors that may drive the strengthening of investment-grade corporate bonds, including the gradual stabilization of interest rate fluctuations and the relative increase in demand from investors in the US and overseas as yields stabilize at a higher level.
The strategist said that overall, bond yields have now reached or are close to new highs in the current cycle, corporate credit fundamentals are in a very good state, and the balance between supply and demand for investment-grade corporate bonds is expected to continue to improve throughout the fourth quarter.
Currently, the yield on US long-term treasury bonds continues to be high, but J.P. Morgan believes that high yields driven by strong economic growth are not entirely bad for corporate bonds. Economic resilience means that corporate profits can be better supported, thereby helping to maintain corporate solvency and credit quality.
This is also an important reason why the bank is more optimistic about investment-grade corporate bonds compared to other fixed income assets.
Since this year, the boom in AI infrastructure construction has pushed large technology companies into the bond market for financing. The market once feared that the continued issuance of bonds by hyperscale cloud computing companies might put pressure on the supply and demand relationship of investment-grade corporate bonds.
J.P. Morgan predicts that about 50 billion US dollars of hyperscale cloud computing corporate bonds may still enter the market during the rest of this year. However, the bank believes that compared to the size of bonds that have been issued by these technology companies in the global market since this year, 50 billion US dollars is only “a dime”, so it is not enough to change the judgment that overall supply slowed in the fourth quarter. The bank estimates that the issuance scale of US investment-grade corporate bonds will be about 305 billion US dollars for the rest of the year. This will make the fourth quarter the quarter with the lowest issuance volume in the whole year, in line with the seasonal pattern where issuance activity usually slowed down in the fourth quarter of previous years.
As supply pressure falls, if high yields continue to attract domestic and foreign capital from the US into the investment-grade bond market, the supply and demand environment is expected to further develop in a direction favorable to investors and push credit spreads to narrow.
When comparing different fixed income assets, J.P. Morgan strategists described US investment-grade corporate bonds as “the best house in a poor neighborhood,” meaning that when the overall bond market is still under pressure from high interest rates, the relative investment value of investment-grade corporate bonds is more prominent.
The bank pointed out that if the rise in bond yields is mainly due to strong US economic growth rather than deteriorating economic or corporate fundamentals, then this environment will have a more positive impact on corporate profits. Therefore, compared with other fixed income assets such as mortgage-backed securities (MBS) and municipal bonds, investment-grade corporate bonds can receive stronger fundamental support.
According to J.P. Morgan Chase, current investment-grade corporate bonds also have many favorable factors, such as high absolute yields, stable corporate fundamentals, and an improvement in the relationship between supply and demand in the fourth quarter. As pressure on large technology companies to issue bonds gradually eases and investor demand picks up, US investment-grade corporate bonds are expected to outperform US treasury bonds in the last quarter of this year.