In This Article:
(Bloomberg) -- High-grade corporate bonds are likely to grow more attractive to fund managers as bond yields are pushed higher following the US losing its last top credit grading, according to JPMorgan Chase & Co.
Most Read from Bloomberg
Moody’s Ratings lowered the credit score on the US on Friday, joining Fitch Ratings and S&P Global Ratings in grading the world’s biggest borrower below the top, triple-A position. Moody’s cited concerns about ballooning debt and deficits that will damage America’s standing as a global capital destination and increase borrowing costs.
Perceived credit risk rose and stocks fell alongside long-dated Treasuries on Monday as investors feared the Moody’s downgrade risks reinforcing Wall Street’s growing worries over the US sovereign bond market as a ballooning budget deficit shows little signs of narrowing.
Investors have been asking how such a downgrade could impact Treasury valuations, both in the coming days and over the medium term, JPMorgan strategists including Eric Beinstein and Nathaniel Rosenbaum wrote in a note Monday citing a separate note from their rates colleagues. In the near term, risks are skewed toward bearish steepening — when rates on long-dated Treasuries rise faster than rates on short-dated ones — given trade and monetary policy uncertainty amid a structural shift in demand, they wrote.
Still, JPMorgan expects significantly smaller moves than the turmoil witnessed after the early-April tariff announcements as the Moody’s downgrade was widely expected. Investor positioning is also more neutral now and it will be less likely to exaggerate fundamental market moves than it did last month, they added.
The downgrade comes at a time when investment-grade market is in strong technical shape, Beinstein and Rosenbaum wrote. Historically, when yields rise there’s usually less demand from retail investors but more appetite from institutional buyers who own a much larger share of high-grade credit, they added.
“If our rates colleagues are correct that the impact on yields is likely to be modestly higher rates, then we believe the near term impact on spreads will not be significant, and may be positive so long as equity markets are not too negatively impacted,” JPMorgan credit strategists wrote.
(Corrects direction of movement in steepener trade in fourth paragraph.)
Most Read from Bloomberg Businessweek