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Monday, February 6, 2023

J.P. Morgan expects bond yields to fall some in 2023 as demand/provide stability improves

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Torsten Asmus

J.P. Morgan strategists, headed by Nikalaos Panigirtzoglou, count on a small quantity of downward stress on international combination bond yields in 2023, as they calculate an enchancment within the demand/provide stability for 2023 is near $1T, as bond provide declines greater than demand.

An enchancment of $1T in provide/demand implies downward stress on International Agg yields of ~40 foundation factors, they mentioned.

They estimate international bond demand to contract by ~$0.7T subsequent 12 months vs. 2022 and provide to drop by $1.6T.

G4 central banks’ demand for bonds are anticipated to say no $1.5T in 2023, on prime of the $1.7T deterioration demand seen in 2022, the strategists mentioned.

Retail traders additionally play an element. “Given [the] sharp rise in international yields in 2022 to ranges final seen round or earlier than the monetary disaster, the repricing of yields ought to in our thoughts present an incentive for retail traders to extend bond holdings, significantly in an setting the place central banks’ coverage charges peak in 1Q23 and U.S. development slows regularly via the 12 months,” the strategists wrote in a current word.

One of many dangers to that state of affairs is that the Fed coverage charges, anticipated to rise to ~5%, fail to deliver inflation down. That will push yields increased and outflows may proceed via at the very least the primary half of 2023, they mentioned. A second threat is that inflation stays elevated at the same time as inflation comes down, resulting in a extra fast improve in bond demand from retail traders.

“As a baseline, we conservatively challenge internet inflows of round $250B in 2023, according to the decrease finish of its vary over the previous decade, which might symbolize internet enchancment in demand of round $0.5T,” the JPMorgan strategists wrote.

For G4 industrial banks, the strategists count on about $200B of internet promoting of bonds in 2023, representing a internet enchancment in bond demand by ~$240B relative to 2022.

Taking a look at G4 pension funds and insurance coverage corporations, they challenge unchanged demand relative to 2022, because the strategists see a “robust incentive for outlined profit pension funds to lock within the features within the funded standing” that occurred this 12 months.

For bond provide, the J.P. Morgan strategists count on internet issuance to say no to pre-pandemic ranges of ~$2.7T, with broad declines throughout authorities and unfold product issuance.

Observe that the Vanguard Whole Bond Market ETF (BND) has been enhancing up to now month as seen on this chart, although it is nonetheless down 15% from a 12 months in the past, simply barely worse than the S&P 500’s 14% decline. The Pimco Lively Bond ETF (BOND), by comparability, fell 17%.

SA contributor Trendy Earnings Investor spells out why it thinks the BOND ETF is the fallacious technique on the fallacious time.

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