Global Investment Bank: "US Investment-Grade Bond Yields Will Surpass Speculative-Grade"

JP Morgan Projects 12% Return on Investment-Grade Bonds This Year
First Time in 4 Years... Impact of Growth Slowdown and Interest Rate Cuts
Negative Outlook Also Present... Mitsubishi Says "We Need to Wait for Now"

Global investment banks have predicted for the first time since 2020 that this year, U.S. investment-grade bond yields will surpass speculative-grade bond yields.

On the 3rd, Bloomberg reported that JP Morgan and Morgan Stanley made such forecasts.

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According to Bloomberg, JP Morgan expects annual returns of 12% and 11% for investment-grade and speculative-grade bonds respectively this year. Morgan Stanley anticipates 9% and 7% respectively. Bank of America (BOA) also recommended higher-rated bonds this year, considering interest rates, income, and credit issuance.

Since 2020, investment-grade bond yields have consistently lagged behind speculative-grade bond yields. According to surveys by Bloomberg and Morningstar, in 2020, investment-grade and speculative-grade bond yields were 9.9% and 7.1% respectively, but in 2021, investment-grade bond yields fell to -1% while speculative-grade bond yields rose to 5.3%. In 2022, investment-grade and speculative-grade bond yields were -15.8% and -11.2% respectively, and in 2023, they were 8.8% and 12.9%.

Investment-grade bond yields struggled to rise throughout the year until the rally (a shift from bearish to bullish) began in November last year. Expectations of higher interest rates and stronger-than-expected economic growth led to higher yields for speculative-grade bonds and leveraged loans. Bloomberg noted, "The story could change in 2024 as growth slows and investors anticipate interest rate cuts."

Morgan Stanley explained that fixed-rate debt typically issued by investment-grade companies is sensitive to interest rate hikes, so if the U.S. Federal Reserve (Fed) lowers borrowing costs, these bonds could benefit. Vishwas Patkar, a Morgan Stanley strategist, said, "We expect the economy to achieve a soft landing, but there will be challenges along the way. It depends on the macroeconomic environment." He also forecasted that returns from short-term debt such as 5-year maturity bonds have greater potential for increase compared to long-term credit.

However, there are not only optimistic views on investment-grade bonds. Unlike JP Morgan and Morgan Stanley, Citi expects bond yields this year to be 3.9% for investment-grade and 6% for speculative-grade, forecasting higher yields for speculative-grade bonds. BlackRock recommended reducing exposure to global investment-grade bonds due to narrow spreads (interest rate differentials).

Strategists from Mitsubishi UFJ Financial Group advised waiting before investing in U.S. bonds, warning that if the economy experiences a bumpy landing, there could be significant downside risk.

This content was produced with the assistance of AI translation services.