Recent supportive technical factors for fixed income have softened somewhat. Fund flows have turned negative for both high yield and emerging market debt, although not to an extent that would cause us concern, while investment grade funds have continued to attract inflows. On the supply front, we are coming out of the earnings blackout period for most corporates, so we expect primary market activity to be elevated for a short while. In the busiest week of issuance so far this year, US investment grade markets had to absorb about USD 46 billion in new supply in the week to 10 May, including two of the 10 largest bond deals on record (Bristol Myers Squibb and IBM). In the high yield market, supply has picked up too, but not quite to the same extent, and plenty of cash is expected to come back to investors through bonds being called. Although supply has picked up in credit markets on the whole, we retain our long-term outlook of low net supply.
What does this mean for fixed income investors?
We do not expect a repeat of the risk asset rout experienced in the fourth quarter of last year, given that some of the growth worries have been addressed and central bank policy looks set to remain accommodative for the foreseeable future. Trade wars therefore continue to be one of our main concerns, especially now that the tail risk has likely increased. We believe a significant determinant of the future direction of trade policy will be market reaction. Should risk assets sell off substantially, the US administration may strike a more conciliatory tone, providing investors with a buying opportunity. However, if the recent risk-off move proves to be just a wobble, Washington may be emboldened to put further pressure on China by following through on tariffs that have been threatened but not yet enacted.
About the Bond Bulletin
Each week J.P. Morgan Asset Management’s Global Fixed Income, Currency and Commodities group reviews key issues for bond investors through the lens of its common Fundamental, Quantitative Valuation and Technical (FQT) research framework.
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