JPM: Treasuries the "Main Risk", High-Grade Bonds Look "Bulletproof"

Here's another market theory that will likely implode soon enough: Buy corporates, treasury volatility is the main risk.

What selloff? Investors in U.S. investment-grade corporate bonds don’t seem to care what’s happening in the broader market as spreads hold at their tightest level in more than 10 years.

The Bloomberg Barclays U.S. investment grade bond index has fallen to 85 basis points, the lowest level since February 2007, even as Treasury yields rose nearly 20 basis points last week and the S&P 500 Index saw its worst weekly loss in two years.

Investment-grade bond spreads have tightened partly as a result of companies holding off on selling debt amid a jump in benchmark rates, which have risen due to concerns that accelerating inflation could lead to a faster pace of hikes by the Federal Reserve. The pause in issuance comes after firms rushed to borrow while it was cheap.

High-grade debt spreads have tightened by two basis points a week since mid-November and reached the tightest since the post-financial crisis period, driven by higher 10-year Treasury yields, Eric Beinstein, JPMorgan Chase & Co.’s head of U.S. high-grade strategy, wrote in a report.

“The accelerated Treasury selloff has caused a spread rally slowdown recently,” he wrote. “We believe Treasury volatility represents the main risk in the near term.”

Three Points

  • A corporate bond scare is likely not far off.
  • When this everything bubble finally bursts, there will be no talk of "bulletproof" anything.
  • Long-dated Treasuries and gold are both unloved. Those are the places to be.

Mike "Mish" Shedlock

We're waiting for the fed reaction now - that will determine if this really is an 'everything bubble' or just another taper tantrum like 2013. Will it prove a false breakout in US 10yrs?

As an interesting speculation, if everything turns sour, how far this QE madness can be taken? Kicking the can forever? When the fundamental flaws will brake the system? Possibly when the real economy can not pay the interest on the existing virtual money pile? Are we far from that point still?

how much can corporate investment spreads winden 50 or 75 bps? doubt the risk in i.g. corporate bonds is anywhere near the risk of equities

I think the markets (bonds and equities) have just woken up to rises in LIBOR rates. As LIBOR rates rises we are more likely to get a Minsky Moment as credit starts to contract. Need the housing markets in China, Australia, Canada etc. to head south before this really happens. UK housing market this as just started although UK equities are not so over priced compared to the US. The BBC will blame Brexit for any global sell off.

The key thing to watch is whether the markets rally big from here, or make a gradual recovery in small steps. If it is the latter, then it is less likely that we are at the start of a bear market. More than big one-day declines, it is big one-day rallies that indicate a bear market (we have already seen that happen in bitcoin which indeed is in a raging bear market right now)...

"The real question is: What happens when QE4 does happen. I think it's inevitable. Will stocks sell off? I thought QE3 would have done it. It didn't."

What's Einstein's definition of insanity? The reason QE's don't work, stocks will keep rising, and blue chip corporates are safer than treasuries is QE doesn't mend confidence in govt, global investment swamps QE and trade, and Govt's default often and with corp's you at least get something.

I think Einstein should have said insanity is doing the same thing again and again thinking it will always work. QE4 will no longer work when the excess liquidity can no longer find suitable investments and investors realize that the liability incurred with debt far exceeds its potential to generate income, and the currency in which it is denominated is losing value. you don't want to hold debt in a deflationary event.