High grade technicals will push spreads tighter, predicts JP Morgan

Although spreads on high grade bonds have widened substantially in recent months, there is still a longer term shortage of products available for investment grade bond buyers, says JP Morgan. Spreads on high grade corporates have widened 172 basis points since May to 339bp (or by 75bp to 205bp if financials are excluded), according to the bank's latest Credit Market Outlook and Strategy report.

But technical factors may push spreads tighter. Inflows into high grade funds are positive, and at the same time, investors have a lot of income to reinvest. This year, the bank's analysts calculate, there have been $725 billion of coupons paid on bonds (including corporate bonds and structured products), but only $317 billion of new issuance in these sectors.

Constrained supply leaves insurers and other traditional fixed income investors with few alternatives except high grade bonds, which will provide powerful demand over time, notes the report.