Major banks, including JPMorgan Chase & Co. and Morgan Stanley, are forecasting that returns from U.S. investment-grade bonds will surpass speculative-grade debt in 2024. This reversal marks the first time in four years and reflects investor positioning for anticipated interest-rate cuts and a slower economic growth environment. Bank of America Corp. aligns with this sentiment, recommending higher-rated bonds over junk debt due to expected challenges in rates, earnings, and issuance throughout the year.
Fixed-rate debt, typically issued by investment-grade companies, is more sensitive to interest-rate hikes. Investors holding such bonds are expected to benefit from the Federal Reserve’s projected lowering of borrowing costs in the coming year. Concurrently, the potential economic slowdown could exert downward pressure on the performance of lower-rated debt, a scenario envisioned by Morgan Stanley.
Morgan Stanley strategist Vishwas Patkar emphasized the significance of the macroeconomic environment in this shift, foreseeing a soft landing for the economy with occasional challenges. He suggests better upside potential for returns from shorter-dated debt, such as five-year bonds, compared to longer-duration credit, which experienced a December rally and now has limited upside.
Globally, investment-grade debt faced challenges in 2023 until a November rally led to a nearly 10% increase, the most substantial two-month jump on record. As economic growth diminishes and investors factor in potential rate cuts, the dynamics of the bond market could evolve in 2024.
While some firms express optimism about investment-grade debt, BlackRock Inc. is cautious, citing tight spreads that may not compensate for the anticipated impact on corporate balance sheets from rate hikes. Mitsubishi UFJ Financial Group takes a more conservative stance, warning of potential downsides in the event of a “bumpy landing” and advising money managers to wait before investing in U.S. fixed income.
Robeco, an institutional asset manager, views uncertainty around a possible recession as strengthening the case for investment-grade credit over high-yield debt. With attractive yields and promising return prospects, investment-grade credit is positioned to compete favorably with riskier asset classes, according to Robeco strategists Sander Bus and Reinout Schapers.
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