Credit investors are loading up on riskier debt, betting that Iran and the US can extend their truce, and leaving behind havens they’ve favoured since the war broke out in late February.
In the first half of April, investors bought a net $500 million of bonds in the lowest tier of investment grade, and sold $7.3 billion of the higher tiers, according to JPMorgan Chase & Co. That helped BBB bonds perform comparatively better than higher-rated notes, pushing the gap between spreads for BBB and A corporates to the tightest since before the war.
There may be good reason for these slightly riskier bonds to be performing better: BBB rated companies have outperformed analysts’ average forecasts more than A companies have, according to a Bloomberg News analysis.
Buyers are hoping a more lasting peace in West Asia can be forged by negotiators, and that companies in the lower edges of investment grade can keep performing well.
“There is some value in the BBB space and issuers there have been good stewards of the balance sheet and generally improving credit quality,” said Gene Tannuzzo, global head of fixed income at Columbia Threadneedle Investments.
Investors have also been snatching up junk bonds, although with a preference for the higher-rated end of the spectrum, implying that money managers still see risk ahead even as they grow moderately more hopeful. Overall spreads for junk bonds are at their tightest since the war began, averaging 2.72% as of Thursday’s close.