JPMorgan Investment Management Inc.’s Oksana Aronov is sure of at least one change coming in credit markets, namely that spreads between yields on junk bonds and comparable Treasuries absolutely must widen.
(Bloomberg) — JPMorgan Investment Management Inc.’s Oksana Aronov is sure of at least one change coming in credit markets, namely that spreads between yields on junk bonds and comparable Treasuries absolutely must widen.
“High-yield spreads have no business being down there,” the firm’s head of market strategy told Bloomberg Television’s The Open on Wednesday, referring to the Bloomberg spread index that closed a day earlier at 389 basis points, near this year’s low.
“As you see more and more of these deals that are short term, high coupon — a Hail Mary, last-ditch attempt to try to stave off a refinancing — and when you see deals that promise to pay you in-kind as opposed to pay you back in money, these are harbingers of wider spreads down the road,” she said.
Riskier US junk bonds have received investor demand partly from offering fatter yields than other fixed-income securities, and also because the economy is showing resilience in the face of higher interest rates. Federal Reserve Chairman Jerome Powell told Congress in testimony this week that rates may have to rise and stay elevated for some time to reduce the fastest inflation in decades.
While Aronov concedes that the economy has proven durable short term and corporate “balance sheets were generally strong” when the Fed began its rates campaign last year, she points out that junk-bond spreads are “below the long term average, forget any recession average.”
Investors who wait to buy bonds at higher spreads will be rewarded, she said. “Stay tuned, there will be great opportunities in credit,” according to Aronov.
A reason to wait is the concern that Powell’s testimony is causing in the bond markets. Many investors and traders now anticipate the Fed will raise overnight lending rates by 50 basis points at its policy meeting this month, rather than the 25 basis points previously expected.
“The odds of this hike moving from 25 to 50 basis points jumped from 35% to something close to 70%” after Powell’s testimony on Tuesday, Aronov said. In keeping rates elevated, “I think Powell should remain steadfast if he wants to see the results he says he wants, which is taming inflation,” she said.
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