HG bond spreads have rebounded from the growth scare of two weeks ago and continue to trade well, in a narrow range near the YTD tightest level. This is despite risks from the Delta variant of the Covid virus and low UST yields. 2Q earnings are coming in extremely strongly, giving support to the market. Sales are up 24% y/y which is 5% above consensus, with ½ of the S&P 500 having reported. Despite low yields, demand for long duration remains strong, as evidenced by the recent flattening of the 10s30s yield curve. Long-end investors appear to have capitulated to the current rate environment. The rally in rates has led to meaningfully positive total return gains in HG and HY credit, creating an unusual situation where both credit and equities are doing well. The risk of this is less diversification in a selloff. The PBGC guidance on multi-employer pension relief is an incremental positive for the long-end but no game changer. With a change in our JULI index earlier this month, the index spread moved 5bp lower (we added the 20yr UST to the calculations), and with this we moved our YE forecast 5bp lower too, to 105bp. JULI is currently at 110bp, so near our target.

JPM continues to expect much higher UST yields by YE. If this proves correct the risk to our forecast is probably on the tighter side – but the path of UST yields is clearly difficult to see at the moment.