JPMorgan, PGIM Say It’s Time to Buy High-Grade Bonds With 88% Trading at Discount

Katie Greifeld, Bloomberg News

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Monday, Aug. 23, 2021. U.S. futures rose Monday along with stocks in Europe as concerns about China's wealth crackdown faded and traders took advantage of last week's selloff to pick up equities at favorable valuations. Bonds declined as demand for havens eased. Photographer: Michael Nagle/Bloomberg , Bloomberg

(Bloomberg) -- Most of the US investment-grade bond market is trading at a discount, and PGIM and JPMorgan say it’s time to buy.

About 88% of high-grade bonds in a Bloomberg index are trading below par through Tuesday, according to data compiled by Bloomberg. That compares to just 4% a year ago, highlighting the destruction on fixed-income returns wrought by inflation and a historically aggressive Federal Reserve rate-hike program.

The magnitude of that drawdown has inevitably created bargains in the blue-chip bond market, according to PGIM’s Michael Collins. While strategists have warned that risk premiums are due to climb as the Fed continues to tighten, corporate default rates are still very low relative to previous downturns, a welcome sign for oversold corporate debt, Collins said.

“We’re seeing the bonds across the board, across all of our portfolios, trading at big discounts to par and as you know as long as they don’t default, they end up back at par,” Collins, PGIM senior portfolio manager, said on Bloomberg Television. “So you have this really positive long-term opportunity in fixed-income which we haven’t had in well over a decade.”

The Fed unleashed its third consecutive 75-basis point rate hike on Wednesday in a bid to tame the hottest inflation in decades. Fed chief Jerome Powell and other policy makers have warned that cooling price pressures could come at the expense of growth.

Even against that grim backdrop, JPMorgan strategists agree that the selloff in high-grade bonds may have gone too far. Dramatic interest-rate moves this year have brought investment-grade prices to new lows just under $90, close to levels unseen since the “darkest days” of 2008, they wrote in a report Wednesday.

“If rates continue to climb at anywhere close to the current velocity, HG will soon be in unchartered $ price territory,” strategists including Nathaniel Rosenbaum wrote. “We believe this is a reflection of, on a fundamental level, interest rate risk being the main driver of spread widening rather than credit risk.”