Wall Street veteran Bob Michele is eyeing opportunities in intermediate government bonds and investment grade credit as the US edges toward a recession by the end of the year.
“This is the time where you clip coupons because yields have reset materially higher from where they were at the end of 2021,” Michele told Bloomberg Television on Wednesday. “Actually, when you look at real yields in the bond market, they’re the highest level going back 15, 17 years. We’re going to get some capital appreciation on top of the coupon clipping. I’m looking for close to double-digit returns on the Bloomberg aggregate over the next year.”
The chief investment officer for JPMorgan Investment Management Inc. said he sees opportunities in five-year Treasuries, given the “backup in yields.” He added that yields in the US investment-grade corporate bond market have once again attracted overseas investors.
Michele reiterated his call to see 3% across the yield curve, which would represent a victory over inflation but a loss for the US economy. He warned against this cycle’s “cash trap” effect.
“You put money there and then a year from now it’s gone. Your cash run rate is probably below 4% a year from now. So you’ve lost all of that, and then the yield curve starts to adjust to a central bank that’s cutting rates again,” he said.
Michele still anticipates a recession by the end of the year and expects the Federal Reserve will start to cut rates in September.
Higher costs and funding pressures have already started to hit households and businesses, according to Michele. He added that growth and inflation are coming down and said that the peak in inflation and bond yields happened last year. “We’re going to have lower highs and lower lows,” he said.
Michele also discussed the issue of the debt ceiling. On Wednesday, the House of Representatives is set to vote on a debt-limit deal struck by the White House and Speaker Kevin McCarthy as the government craters toward potential default.
If lawmakers raise the debt ceiling, analysts have flagged that the presumed levels of T-bill issuance might suck liquidity from the markets. But Michele said it “shouldn’t be” a problem.
“I’m hoping that it gives banks and money market funds somewhere else to put their money other than overnight reverse repo with the Fed,” he said. “So maybe that will give us another avenue to invest.”
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