High Grade Strategy

HG bond spreads reached our YE forecast of 110bp this week. We maintain this forecast, seeing little value in spreads here, and also few catalysts for a meaningful move wider. The Fed has reminded us of the obvious – that they will gradually reduce the extreme accommodation and that they will do so slowly. This in itself isn’t concerning, but the move lower in yields, particularly in the long end, is likely to lead to steeper spread curves and some widening pressure at first. The move lower in spreads recently has been supported by both strong fund inflows and attractive valuation for foreign investors. They are benefitting from low FX hedging costs. Near term strong total returns should support domestic demand while foreign demand will likely soften with lower yields. We published on the impact on ESG across credit markets globally – finding an impact in Europe but not much in the US to date.