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JPMorgan CIO: Recession approaching 'investment-grade corporate bonds' worth considering

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Bob Michele, a bond market veteran with decades of experience, chose to invest in short-term investment-grade bonds during the coming downturn. "I am convinced that the market is heading for a recession, and high-quality fixed income will be the anchor of the economic storm." JPMorgan Chase (126.97, -1.18, -0.92%) Asset Management Chief Investment Officer (CIO) Michelle said. For the U.S. high-yield market, he expects market pain to only intensify as a recession looms.

"Businesses and households with such strong balance sheets reflect the current low unemployment rate in the U.S., which means the Fed will continue to raise interest rates. The Fed's actions indicate that the economy is going to get very bad in the market," he said.

This year, higher interest rates have hurt returns for debt investors in the credit-rated range. Investment-grade corporate bonds, which are more sensitive to changes in interest rates due to their longer durations, have fallen more than 19% this year and are on track for their biggest annual drop ever. But Michele expects the repricing in this trusted corner of the market to be all but over and sees opportunities for short-term (less than two years) investment-grade companies and short-term securitized credit. He also takes a more favorable view of its long-term debt.

"For the first time in several years, I'm really thinking about buying high-quality, long-term assets," Michelle said. "All that's left is to wait."

Meanwhile, the junk bond market's repricing is only about a third complete, he said. Average junk bond spreads closed at 447 basis points on Tuesday, and Mitchell expects the risk premium to peak around 800 to 1,000 basis points in the middle of a recession. He added that while the index was "slightly better" from a quality standpoint, there was a lot of money in the debt market going to low-quality companies, most of which was illiquid and from private credit markets.

"And for investors who want to take a risk in private credit, the public markets will be the pressure-relief valve," Mitchell said.

Borrowing costs are also soaring as the Fed raises interest rates, making it harder for issuers to raise new capital. The era of benign credit conditions with low interest rates and ample liquidity is coming to an end, risks are rising across the credit sector, defaults are likely to accelerate and liquidity remains scarce, Moody's Investors Service said in a report on Wednesday.

"The market has already priced in a soft landing, but not a recession," he said. "When credit spreads start to widen, we'll know how much the market will price in that recession."

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