1、North America Credit Research13 June 2019 Credit Market Outlook&StrategyUS High Grade Strategy&CDS ResearchUS High Grade Strategy&Credit Derivatives ResearchEric Beinstein AC(1-212)834-Pavan D Talreja(1-212)834-Sheila Xie(1-212)834-J.P.Morgan Securities LLCSee page 26 for analyst certification and i
2、mportant disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single fac
3、tor in making their investment High Grade StrategyCurrently HG bond spreads are at 156bp,which is near our YE forecast of 150bp.Spreads started the year at 180bp,rallied to a low of 138bp in late April,and reached a peak of 163bp in late May.Over the past two months they have been within 15bp of our
4、 YE expectation.During this period,our view on the Fed has also changed sharply.We are now expecting two rate cuts in 2H19 from zero earlier this year.We also revised down our UST 10yr YE forecast to 1.75%from 2.75%at the beginning of April.These two forecast changes are offsetting in their impact o
5、n HG credit spreads,to some extent.A more dovish Fed,and more dovish central banks globally,are supportive for HG credit spreads.Flows into HG bond funds remain robust,and they did so through the volatility in May.We found in our June investor survey results that investor sentiment is modestly more
6、positive since the very weak outlook from last month,but they remain cautious.Credit DerivativesCredit derivatives have rallied across the board in June so far.However,the strength of the rally has not been uniform across different index products.CDX indices had the strongest recovery after the sell
7、off last month.Cash based derivatives have underperformed in the rally adding to the underperformanceduring the selloff earlier in the quarter.We believe this is similar to the performance in January this year where CDX indices outperformed in the initial leg of the rally.Also notable is the decompr
8、ession in CDX.HY vs CDX.IG.We believe some of the decompression is driven by the performance in the tails.Furthermore,changes in client positions also added to the decompression.We expect CDX.HY to outperform locally given the optics of the CDX.IG index.The CDX options market is reflecting investor
9、caution despite the strong index performance.We discuss an option trade to take advantage of this divergence.Trade TrackerSince our last publication,our Trade Tracker is up$111,858.Over the last twelve months,performance is up by$720,174(+4.3%ROI/+19.8%IRR).Chart of the week:HG bond spreads have bee
10、n within 15bp of our YE expectation of 150bp over the past couple of monthsSource:J.P.Morgan100120140160180200Jan-18Apr-18Jul-18Oct-18Jan-19Apr-19Jul-19JULI SpreadYE Spread ForecastbpCurrent spread:156bp2North America Credit Research13 June 2019Eric Beinstein(1-212)834- Table of ContentsSummary and
11、Outlook.3The High Grade Week Ahead.10Credit Derivatives.14Trade Tracker.19High Grade Analytics.20Sector recommendations.20JULI sector statistics and performance.23Credit Derivatives Analytics.24HG CDS-bond basis across buckets.24Previous Featured Articles.253North America Credit Research13 June 2019
12、Eric Beinstein(1-212)834- Summary and OutlookA cautious rally,as usual.Spreads are near our YE target-tighter then wider,potentiallyIn June,spreads have rallied but in a way that suggests investors remain cautious.This is reflected in the outperformance of CDX.IG vs HG cash,in the outperformance of
13、sectors seen as less exposed to tariffs and global growth,and in the continued steepness of spread curves.This pattern was also evident early in the year in the 1Q rally,and then over time bond markets and wider spread credit caught up as investors became more comfortable and sought out opportunitie
14、s which had lagged.Currently HG bond spreads are at 156bp which is near our YE 150bp target.Spreads started the year at 180bp,rallied to a low of 138bp in late April,and reached a peak of 163bp in late May.Over the past two months they have been within 15bp of our YE expectation.Over these two month
15、s our view on the Fed has changed sharply(now expecting 2 cuts in 2H19 from zero).Also,JPMs views on UST yields have changed,with the UST 10yr YE forecast now at 1.75%,down from 2.75%at the beginning of April.These two forecast changes are offsetting in their impact on HG credit spreads,to some exte
16、nt.A more dovish Fed,and more dovish central banks globally,is supportive for HG credit spreads.It supports US and global growth,and it encourages investors to be more comfortable with risky assets.On the other hand there is a modest negative correlation between UST yields and HG bond spreads over t
17、ime,so the decline in UST yields is a negative for spreads.JPM expects these yields to decline further,potentially adding further upward pressure on spreads if this forecast proves correct.Exhibit 1:HG bond spreads have been within 15bp of our YE expectation of 150bp over the past couple of monthsEx
18、hibit 2:HG bond yields declined to 3.8%,the lowest since January 2018Source:J.P.MorganHowever,when JPM changed the Fed and rates views there were only modest changes to the US growth outlook.Basically we expect the Fed to lower rates,and for it to work i.e.,for US GDP to continue in the 1-5-2.0%rang
19、e that has persisted for a while.Specifically,growth in 1Q19 was 3.1%and we expect 1.0%in 2Q19,so an average of 2.1%for 1H19.In 3Q19 we expect 1.50%growth and in 4Q19-2Q20 we expect 1.75%growth.If these forecasts come true that is a pretty supportive growth environment for HG credit.Combine this wit
20、h the decline in HG bond supply which is underway(-7%y/y gross supply and-20%y/y net supply through May)and there are meaningful offsets to the negative of lower UST yields on HG bond spreads.100120140160180200Jan-18Apr-18Jul-18Oct-18Jan-19Apr-19Jul-19JULI SpreadYE Spread ForecastbpCurrent spread:15
21、6bp3.43.63.84.04.24.44.64.8Jan-18Apr-18Jul-18Oct-18Jan-19Apr-19Jul-19JULI Yields%Current yield:3.8%4North America Credit Research13 June 2019Eric Beinstein(1-212)834- For us the biggest risk to spreads is not UST yields but politics,history and the strong returns YTD.HG credit has returned 7.5%so fa
22、r in 2019,so as the year progresses it is logical for investors to take risks off the table.Also,the memory of the sharp sell off into YE18 will likely encourage some to reduce risk ahead of 4Q.And most importantly the US presidential election will continue to raise risks to markets.Over time if/whe
23、n polls show a Democratic candidate leading markets will likely get concerned,given that some candidates on the Democratic side are advocating policies which would be negative for the big four sectors in HG credit(Banks,TMT,Energy,Healthcare).It is difficult to know when these concerns will heat up,
24、but about two months ago the healthcare sector underperformed in both equity and credit when the discussion of Medicare for All was active-and this was 18 months before the election with still 20 Democratic candidates in the running.If/when the leading candidates(s)are becoming clear these concerns
25、will likely arise again.So,in summary,we believe spreads will do well in the coming months as supply is light over the summer and the Fed cuts are pending.Later in the year more caution is warranted.There are two competing dynamics impacting overseas demand for HG credit-a dip now but more demand co
26、ming,we believeOn the positive side yields have declined significantly more overseas than in the US,in percentage terms.For example,YTD USD HG corporate bond yields(in the 7-10yr tenor)are down 77bp to 3.09%while EUR HG corporate yield(also 7-10yrs)are down 84bp to 0.67%.These figures are based on o
27、ur portfolio of matching bonds where there is one USD bond and one EUR bond from the same issuer and similar maturity.Based on this sample US HG bond yields are around their lowest level since the US Presidential Election in 2016 while EUR HG corporate yields are at their lowest level since Jan 2014
28、,at least.However,in relative terms USD bonds now offer 4.6x times the yield of an equivalent EUR corporate bond(both 7-10yrs).This compares to only 2.6x times the yield at the start of the year.The ratio between USD and EUR HG bond yields is at its highest level since Jan 2014 at least.This same dy
29、namic has seen the amount of global bonds with negative yields rise sharply YTD(from$9.3tn to$11.2tn).This would be expected to be driving more overseas investors to US assets where yields are much more attractive.Exhibit 3:Both USD and EUR HG corporate bond yields have declined this yearExhibit 4:H
30、owever,7-10yr US yields as a percent of Euro yields has picked up significantlySource:J.P.MorganThe offsetting factor is that short term FX hedging costs have not come down.This will happen when the gap between US policy rates and other central bank rates narrows.We expect the Fed to lower rates fir
31、st in September,but this may come earlier.Currently,however,US credit yields have declined meaningfully over the 0.5%0.7%0.9%1.1%1.3%1.5%1.7%3.0%3.2%3.4%3.6%3.8%4.0%Dec-18Jan-19Feb-19Mar-19Apr-19May-19USD Yield(7-10yrs)EUR Yield(7-10yrs)100%150%200%250%300%350%400%450%500%Jan-14Jan-15Jan-16Jan-17Jan
32、-18Jan-19USD yields as a percent of EUR yields(7-10yrs)5North America Credit Research13 June 2019Eric Beinstein(1-212)834- past month while hedging costs have not.This has discouraged foreign inflows,we believe.Most of the evidence for this is anecdotal,but the TRACE data on overnight sales shows$72
33、mn/day average in May which is nearly 1/2 the$131mn day from Jan-April.Some of the May decline in these flows may have been due to market volatility and uncertainty so time will tell whether the overseas buying picks up,even as yields stay low,in a more bullish environment.Exhibit 5:The 3m EUR FX he
34、dging cost increased in 2018 and has not come down this yearExhibit 6:This is a similar story for the JPY/USD hedging costsSource:J.P.MorganExhibit 7:Overnight HG bond sales of$72/mn day in May were nearly 1/2 the$131mn day from Jan-April,suggesting less foreign demand recentlySource:J.P.Morgan,TRAC
35、EIn past periods when yields have declined,there tends to be a slowdown in demand initially,but then a buildup of cash and acceptance of the new lower yield environments leads to more demand.We have seen continued strength into HG bond mutual funds and ETFs even through the volatility in May,suggest
36、ing that this demand continues.Heavy primary supply has helped fill this demand very recently,but if/when the primary calendar slows as it usually does this time of year,we expect overseas demand for US credit to pick up.Over time the decline in yields globally,we believe,will continue to push inves
37、tors in search of yield to US credit markets.-400-300-200-1000Jan-14Jan-15Jan-16Jan-17Jan-18Jan-193m EUR FX hedge,annualized,bp-400-300-200-1000Jan-14Jan-15Jan-16Jan-17Jan-18Jan-19JPY/USD 3m FX Hedge Cost,Annualized,bp050100150200250Jan-17May-17Sep-17Jan-18May-18Sep-18Jan-19May-19Net Dealer Sells Vo
38、lume monthly average$mn6North America Credit Research13 June 2019Eric Beinstein(1-212)834- Exhibit 8:At$11.2tr the negative yielding stock of global debt is back to October 2016 peakSource:J.P.MorganFlows into HG bond funds are strong,but recently they are going into Agg vs Corp-only productsFlows i
39、nto HG bond funds remain robust,and they did so through the volatility in May.YTD HG bond funds have had average inflows of$2.2bn/week.Over the past four weeks this figure was$3.1bn/week,so a material uptick,despite the market volatility.This is in sharp contrast to HY funds where YTD inflows are$30
40、0mn/week including$1.8bn/week of outflows on average over the past four weeks.Our universe of HG bond funds includes Agg-based funds and corporate only funds.There has been a difference in the trends there,as over the past four week Agg-based funds have had inflows averaging$2.7bn/week which 60%high
41、er than the YTD average inflows of$1.7bn/week.On the other hand,corp-only funds have had inflows of$327mn/week which is about 30%lower than the YTD average of$480mn/week inflows.So the trend is really one of a flight to quality recently,with outflows from HY,reduction in inflows for HG corporate onl
42、y,and increased inflows into Agg funds where the largest asset class is Treasuries.International domiciled HG bond funds are a small subset of the HG universe,but these funds have seen strong inflows YTD,and this trend has slowed down only modestly recently.YTD the returns on JPMs HG corporate,HY co
43、rporate and UST indices are 7.5%,8.8%and 6.1%,respectively,so these flow trends are not tied to performance-the weakest flow trends are from the strongest returning asset class-HY.Exhibit 9:HG Agg only funds have seen significant inflows in the recent move up in qualityNote:1Q19 reflects the final m
44、onthly fund flow data for Jan-Mar 2019,whereas 2Q19 reflects a combination of monthly fund flows for April and aggregated weekly flows for May-Jun 2019Source:J.P.Morgan78910111213Jun-16Dec-16Jun-17Dec-17Jun-18Dec-18Jun-19Total negative yielding debt stock$tr-10010203040HG Agg onlyHG Corp onlyHG Intl
45、 DomiciledHY1Q192Q19 so far$bnFundflows7North America Credit Research13 June 2019Eric Beinstein(1-212)834- Our investor survey suggests that investor sentiment is improvingWe conducted our June investor survey last week.Investor sentiment is modestly more positive than the very weak outlook from las
46、t months survey.In this survey,26%expressed a positive near-term spread outlook,up from the record low of 10%last month.34%have a negative view,down from the 57%last month.The remaining of 39%are neutral.The portion of investors with high cash holdings rose to 21%from 13%.This is the highest respons
47、e to this question since November 2016.Those with moderate cash holdings fell from 63%to 55%,while the investors with low cash holdings remained around 24%.The share of investors describing themselves as neutral declined from 75%to 66%.Those who are overweight also fell from 25%to 21%.They moved to
48、Underweights,with that category up 13%from 0%last month.At the time of our survey,HG bond spreads were 20bp wider than the recent YTD tight at the end of April.We asked whether investors expect spreads to be tighter or wider than the level at the time by year end.The results are widely distributed w
49、ith a bearish bias.37%said moderately wider(+10-20bp),32%expect spreads will remain around current levels(+/-10bp),and 29%responded moderately tighter(-10-20bp).The remaining 3%believe that HG bond spreads will be significantly wider(more than 20bp).Valuation on several bond market metrics has moved
50、 to levels not seen since the 4Q18 selloff or prior.We asked which of the following relationship they believe is most likely to reverse(i.e.,move away from the extreme end of its current range):Of those who responded,43%voted for potential flattening of the 10s30s spread curve,30%believe that the re
