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

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

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

They estimate international bond demand to contract by ~$0.7T subsequent yr 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 high of the $1.7T deterioration demand seen in 2022, the strategists mentioned.

Retail traders additionally play a component. “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. progress slows progressively by means of the yr,” the strategists wrote in a latest observe.

One of many dangers to that state of affairs is that the Fed coverage charges, anticipated to rise to ~5%, fail to convey inflation down. That will push yields larger and outflows may proceed by means of a minimum of the primary half of 2023, they mentioned. A second threat is that inflation stays elevated whilst inflation comes down, resulting in a extra speedy enhance in bond demand from retail traders.

“As a baseline, we conservatively undertaking 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 anticipate about $200B of internet promoting of bonds in 2023, representing a internet enchancment in bond demand by ~$240B relative to 2022.

G4 pension funds and insurance coverage firms, they undertaking unchanged demand relative to 2022, because the strategists see a “robust incentive for outlined profit pension funds to lock within the beneficial properties within the funded standing” that occurred this yr.

For bond provide, the J.P. Morgan strategists anticipate 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 Complete Bond Market ETF (BND) has been bettering prior to now month as seen on this chart, although it is nonetheless down 15% from a yr in the past, simply barely worse than the S&P 500’s 14% decline. The Pimco Energetic Bond ETF (BOND), by comparability, fell 17%.

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