According to a study by JPMorgan Chase & Co., it is normally worthwhile to purchase US corporate bonds when markets are weak.
Investors who buy top-quality U.S. corporate bonds when spreads rise have made a profit in about 70 percent of cases over the subsequent three months, strategists led by Eric Beinstein and Nathaniel Rosenbaum wrote on Thursday.
“Historically, it seems relatively clear that most of HG’s price declines are intended for short-term buying,” the strategists wrote.
Spreads on high-quality U.S. corporate bonds widened in August but have since partially recovered. After averaging 92 basis points, or 0.92 percentage points, over the primary seven months of the 12 months, they widened to 111 basis points on August 5. They have since settled back to 100 basis points as of Wednesday, in response to Bloomberg index data.
The strategists examined sell-offs within the JPMorgan US Liquid Index (JULI), an investment-grade corporate index. They analyzed times when spreads reached their highest level in three months and remained at that level for the next month. They included periods when the height spread was about 15 basis points higher than the tightest spread within the previous three months to be sure that the moves were a minimum of moderate sell-offs.
By this definition, there have been 37 sell-offs since 2000. If you purchased on the widest point, i.e. if the model worked, the following lowest price in the next three months was on average about 46 basis points lower, the strategists wrote.
But there have also been cases where it didn’t work. Eleven times, a fair greater sell-off occurred three months later, and the market widened by a minimum of five basis points. In May 2022, spreads widened to 173 basis points, only to tighten again and dump again two months later, reaching 180 basis points, because the market misjudged the Federal Reserve’s expectations of a rate hike.
The evaluation is primarily intended to supply a way of history, not as a trading strategy, because in the course of a sell-off, investors have no idea when the market has reached its highest point, the strategists wrote.
