JPMorgan’s army of research analysts, economists, and strategists has been hard at work this year, navigating the significant uncertainties that have shaped the markets. As we pause to assess the broader landscape, it’s clear to us that we have seen pronounced moves across many risk assets. For credit investors, the near record-low spread levels are a key focus. However, given the interconnected nature of risk assets, we are also closely monitoring the implications of equities reaching all-time highs, gold experiencing its strongest year in decades, and the US dollar enduring its weakest year in recent memory.
Credit valuations are expensive, but fundamentals and technicals are strong
While valuations are historically elevated and may, in isolation, deter potential investors, we believe this perspective is incomplete. For institutional investors such as pensions and insurers, long-duration bonds continue to offer meaningful diversification and hedging benefits within a total portfolio asset allocation, alongside generationally attractive yields (please see the chart below). JPMorgan’s Long Term Capital Market Assumptions team seems to share this view, having recently raised their long-term return expectations for long corporate bonds to 5.40% (with volatility of 12.28%), while leaving it unchanged for large cap equities at 6.70% (with volatility at 16.47%), with that improving risk adjusted returns for long corporates.
We believe there remains significant value to be unlocked in long bonds, and waiting for wider spreads or attempting to time the market may not be prudent. Notably because spreads have struggled to widen meaningfully this year—even during pronounced risk-off periods, such as the Liberation Day. We attribute this resilience to an exceptionally strong fundamental and technical backdrop (more on this a little lower), as well as investor positioning that has generally been underweight the sector, prompting them to add risk whenever opportunities arise.
Fundamentals: Corporate fundamentals in the US remain robust. Revenue and earnings are growing at a healthy pace and cash flow generation is strong. The US consumer—long considered the backbone of economic growth—also remains resilient, despite some recent softness in jobs reports. While uncertainties persist, freshly inked trade agreements with key partners are providing greater clarity for corporate leaders. Additionally, the passage of One Big Beautiful Bill Act (OBBBA) is expected to unlock further savings through various tax provisions and may result in growth and inflation pick up early in 2026, but may also lead to lower growth and inflation thereafter due to higher overall tariffs and lower immigration.
Technicals: We have observed significantly lower issuance of long-term bonds this year, largely due to elevated yields. Corporates, acutely aware of their cost of capital, are reluctant to lock in and issue long-dated bonds at current high levels. JPMorgan research indicates that the share of corporate bond issuance with maturities of 20 years or more has been around 10% so far this year, compared to over 20% in 2020 and 2021 when yields were much lower. While many corporates are avoiding long-term issuance, various institutional investors have been actively seeking out longer-dated bonds to secure attractive yields. We believe this supply-demand imbalance presents opportunities for active investors to add value by tactically positioning the portfolio. With that said, if the recent surge in long-term issuance by AI hyperscalers (such as Meta, Google, Amazon, and Oracle) persists, it could potentially shift the balance in an unfavorable direction.
Visible strength during April/2025 bear market
The combination of strong fundamentals and supportive technical factors were in part responsible for the resilience of the long credit market during the sharp equity selloff in April 2025, following the initial announcement of tariffs. As shown in the chart below, previous equity drawdowns that reached near bear market territory—defined as a decline of 20% from the peak—such as in 2018 and 2022, were accompanied by significantly wider long credit spreads, often reaching ~200 bps. In contrast, during the 2025 episode, spread performance was much more contained, reaching only 134 bps, highlighting the underlying strength of the sector and indicating to us that market participants are treating selloffs as a buying opportunity.
Our approach to alpha in current tight credit environment
We believe an active approach is essential in today’s environment where valuations are very tight. Rather than turning the page on long-duration bonds, we recommend that investors focus on four key strategies listed below to unlock value going forward:
- Harvest Yield:
Although spreads remain tight, yields are still elevated but are likely to decline as the Federal Reserve continues to lower policy rates. We believe long term investors should lock-in these yields as the purchase yield is a key determinant of future returns especially if held until maturity. - Add Diversifiers:
We see value in adding and tactically increasing exposure to diversifiers. More specifically, we think Long Securitized offers important diversification and relative value benefits, while high quality Private Market opportunities provide additional spread pickup although with some liquidity give. In addition, Long Municipals—though typically suited for taxable investors—can at times, like this summer, present attractive relative value for tax-exempt investors as well. Although sophisticated asset allocators such as Pensions and Insurance firms can identify and act on relative value opportunities, we believe tactical shifts are best executed by individual managers, given trading costs and the need to respond quickly in markets where every selloff is met with rapid spread compression. - Dynamically Manage Credit Quality:
Active managers should be able to dynamically shift the quality and risk posture of the credit allocation as markets evolve. Stale and static allocations akin to passive investments or perpetual overweight exposure to tightening spreads can be a losing proposition in the current environment in our view. - Emphasize Security Selection:
Security selection should be key. We rely on the extensive experience of our analysts, refined over multiple credit cycles and enriched by sector expertise, to evaluate known and unknown risk factors, to uncover attractive investment opportunities for our clients and, perhaps more importantly, to aim to identify risks that may be mispriced or overlooked by others. That unique expertise allows us to identify idiosyncratic stories where we maintain comfortable overweights.
Capitalizing on today’s market opportunities
In summary, while spreads are less attractive compared to historical levels, overall yields remain attractive, presenting a dilemma for investors. The current yield provides a substantial income and cushion against potential risk-off episodes, helping to mitigate losses in more moderate market downturns. Although that cushion can quickly evaporate in a more severe downturn. On the other hand, given present spread levels, a significant further compression is not our base case. However, we would not be surprised if spreads remain range-bound for an extended period—the 2004–2007 period is case in point—given the robust fundamental and technical backdrop supporting the asset class. We favor tactically adding diversifiers such as long securitized, long municipals and private market opportunities while harvesting yields while they last.
At JPMorgan Asset Management, we are strong advocates of active management—particularly in today’s environment, where thoughtful security selection and rigorous underwriting are crucial. Through our time-tested approach, we seek to avoid troubled issuers, identify emerging leaders, and build diversified portfolios that capitalize on relative value opportunities across sectors and market cycles.