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JP Morgan expects bond yields to fall slightly in 2023 as supply/demand balance improves


Increase bond yields and interest rates.

Torsten Asmus

JP Morgan strategists, led by Nikalaos Panigirtzoglou, expect some downward pressure on global aggregate bond yields in 2023, as they calculate an improvement in the supply/demand balance for 2023 is close to $1 trillion, as bond supply falls more than demand.

A $1 trillion improvement in supply/demand implies downward pressure on global Agg yields by ~40 basis points, they said.

They estimate global bond demand will fall by ~$0.7 trillion next year compared to 2022 and supply will fall by $1.6 trillion.

Strategists say G4 central bank bond demand is expected to fall by $1.5 trillion in 2023, on top of a $1.7 trillion drop in demand seen in 2022.

Retail investors also play a part. “Okay [the] With global yields rising sharply in 2022 to the most recent levels seen around or before the financial crisis, yield re-pricing should, in our opinion, provide an incentive for retail investors to increase their holdings. hold bonds, especially in an environment where central bank policy rates peak in Q1 2023 and U.S. growth slows gradually over the year,” the strategists wrote in a note. recent note.

One of the risks to that scenario is that the Fed’s policy rate, which is expected to rise to ~5%, fails to bring down inflation. That will push yields higher, they said, and outflows could continue through at least the first half of 2023. The second risk is that inflation remains elevated even as inflation falls, leading to demand bonds from retail investors rose faster.

“We essentially conservatively project net inflows of around $250 billion by 2023, in line with the lower end of its range over the past decade,” wrote JPMorgan strategists. this would represent a net improvement in demand of about $0.5 trillion.”

For G4 commercial banks, strategists expect around $200 billion in net bond sales in 2023, representing a net improvement in bond demand of about ~$240 billion compared to 2022.

Looking at G4 pension funds and insurers, they forecast demand unchanged from 2022, as strategists see “strong incentive for defined-benefit pension funds.” to lock profits in “funded status” happening this year.

As for bond supply, JP Morgan strategists expect net issuance to fall to pre-pandemic levels of ~$2.7 trillion, with widespread declines across government and issuance. product spread.

Note that the Vanguard Total Bond Market ETF (BND) has improved in the past month as seen in this chartthough it’s still down 15% from a year ago, only slightly less than the S&P 500’s 14% drop. The Pimco Active Bond ETF (LINK), by comparison, fell 17%.

SA Contributor Modern Income Investor Explains Why They Think BOND ETF Is wrong strategy at wrong time.

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