According to a study by JPMorgan Chase & Co.
Investors who buy top-quality U.S. corporate bonds when spreads rise have made a profit in about 70 percent of cases over the next three months, strategists led by Eric Beinstein and Nathaniel Rosenbaum wrote on Thursday.
“Historically, it seems relatively clear that most of HG’s price declines are intended for short-term buying,” the strategists wrote.
Spreads on high-quality U.S. corporate bonds widened in August but have since partially recovered. After averaging 92 basis points, or 0.92 percentage points, over the first seven months of the year, they widened to 111 basis points on August 5. They have since settled back to 100 basis points as of Wednesday, according to Bloomberg index data.
The strategists examined sell-offs in the JPMorgan US Liquid Index (JULI), an investment-grade corporate index. They analyzed times when spreads reached their highest level in three months and remained at that level for the following month. They included periods when the peak spread was about 15 basis points higher than the tightest spread in the previous three months to ensure that the moves were at least moderate sell-offs.
By this definition, there have been 37 sell-offs since 2000. If you bought at the widest point, i.e. if the model worked, the subsequent lowest price in the following three months was on average about 46 basis points lower, the strategists wrote.
But there have also been cases where it didn’t work. Eleven times, an even bigger sell-off occurred three months later, and the market widened by at least five basis points. In May 2022, spreads widened to 173 basis points, only to tighten again and sell off again two months later, reaching 180 basis points, as the market misjudged the Federal Reserve’s expectations of a rate hike.
The analysis is primarily intended to provide a sense of history, not as a trading strategy, because in the middle of a sell-off, investors do not know when the market has reached its highest point, the strategists wrote.