US corporate bond rally may reach 30-year high

4 mins read
US corporate bond rally may reach 30-year high

The US corporate bond market is poised to continue rising in the second quarter on strong loan demand and expectations of a rate cut by the Federal Reserve. Strategists predict that this rise could reach levels not seen since the 1990s.

The buying spree in credit markets is fueled by expectations that the Fed will successfully contain inflation without triggering a recession and then cut interest rates to support growth. On March 21, credit spreads, the premium companies pay on Treasuries, hit their narrowest in two years at 91 and 305 basis points for investment-grade and junk-rated bonds, respectively.

Insurance companies and pension schemes are experiencing capital inflows from customers seeking to take advantage of higher interest rates. This has led to an increase in corporate bond purchases despite concerns about the adequacy of new bond issuance. In the first quarter, investment grade companies issued a record $538 billion worth of bonds, representing 40% of the expected $1.3 trillion annual bond supply.

Bank of America strategists forecast spreads to narrow further to around 80 basis points next month, approaching the 77 basis point level seen in 2021. However, they maintain their 6-month spread target at 100-120 basis points.

Narrowing spreads benefit companies by lowering borrowing costs. But some investors warn that lower spreads also mean less compensation for risk.

Tailwinds for the bond market are expected to continue, partly due to insurance companies buying corporate bonds to cover liabilities arising from the increase in annuity sales, which reached $385.4 billion in 2023. Also, the reinvestment of coupon payments, estimated at $463 billion for 2024, could absorb a significant portion of this year’s net issuance.

JPMorgan strategists cut their year-end spread target for these bonds by 30 basis points to 95 basis points, noting the strong technical factors driving demand for investment grade credit and reinforcing the optimistic outlook for the corporate bond market as the second quarter approaches.

As the corporate bond market continues to rise, investors are keeping a close eye on companies like Bank of America (BAC) that could benefit from the current financial environment.

Here are some of his views, which may be particularly important for investors monitoring the bond market and Bank of America’s position in it:

Bank of America’s strong market capitalization of $298.27 billion highlights its strong presence in the market. The company’s Price/Earnings (P/E) ratio is 12.22, indicating a potentially attractive valuation by historical standards. Moreover, as of the last twelve months ending Q4 2023, the Price/Book (P/B) ratio is 1.13, suggesting that the stock could be reasonably valued relative to the company’s net assets.

Bank of America has demonstrated its commitment to shareholder returns by raising dividends for 10 consecutive years and maintaining dividend payments for 54 consecutive years. This could be a sign of financial stability and a shareholder-friendly policy, which is often an important consideration for bond investors. Furthermore, the fact that the company is a leading player in the Banks sector may provide some level of reassurance in terms of its market influence and competitive position.


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