JPMorgan: You can profit 70% of the time when you buy a dip in corporate debt

Investors who buy high-quality U.S. corporate bonds when spreads widen made a profit over the next three months about 70 percent of the time, strategists Eric Beinstein and Nathaniel Rosenbaum wrote Thursday.

“Historically, it seems relatively clear that most declines in HG are intended to be bought short-term,” the strategists wrote.

US corporate bond spreads rose further in August but have since partially recovered. After averaging about 92 basis points, or 0.92 percentage points, in the first seven months of the year, spreads widened to 111 basis points on August 5. They have since settled back to 100 basis points as of Wednesday, according to data from Bloomberg Index Data.

Strategists looked at sales in the JPMorgan US Liquid Index, or JULI, an investment-grade corporate index. They looked at the times when spreads reached their highest level in three months, and that remained the highest point for the following month. They considered periods when the top spread was about 15 basis points higher than the tightest spread in the past three months to ensure the moves were at least moderate selling.

There have been 37 sell-offs by this definition since 2000. If someone bought at the widest point, when the pattern worked, the subsequent tightest level averaged about 46 basis points tighter over the next three months, they wrote strategies.

But there were cases where it didn’t work. Eleven times, an even bigger selloff occurred three months later, and the market expanded by at least five basis points. In May 2022, spreads widened to 173 basis points, only to narrow and then sell off again two months later to 180 basis points as the market misjudged expectations interest rate hike by the Federal Reserve.

The analysis is mainly useful for providing a sense of history rather than serving as a trading strategy, because investors don’t know in the middle of a selloff when the market hit its widest point, the strategists wrote.