We can finally quote Bond linked Note on Corporate Bonds now!

Key Comments

• A record amount of money has flooded into US corporate bond markets this year, as investors rush to lock in the highest yields in years ahead of an anticipated series of interest rate cuts by the Federal Reserve. Inflows into corporate bond funds have reached $22.8bn so far in 2024, according to fund tracker EPFR, the first positive start to a year since 2019, when $22.4bn had flowed in by this point.

• Barclays commented that looking at a five-year rolling aggregate z-score of some major metrics (net leverage, interest coverage, EBITDA margins, and quick ratio), the investment grade market does not appear to have any major worrisome characteristics either then or now. Both periods were preceded by a recession, with companies turning cautious on their balance sheets. This lack of fundamental headwinds has contributed to the tightening in spreads and should help keep them around current levels.
  
  
• However, despite spreads being at such low levels, some investors remain concerned about the health of the world’s biggest economy and the potential for deepening corporate distress or a rise in defaults — particularly if the Fed does not deliver the interest rate cuts the market is expecting. Indeed, the bond's quality is crucial. As for the recommended sector, many investment banks, including JPMorgan and Goldman Sachs, generally prefer the financial sector. Since 2023 Nov, U.S. large regional banks credit ratings were largely intact, albeit with less ratings cushion according to Fitch Ratings. This peer group spans from Wells Fargo, JPM, Goldman Sachs and Citi, etc. which recently announced no serious net interest margin (NIM) and funding costs issues.      

• With bond-linked notes, there's a chance of physical bond delivery if the final price falls below the strike. In the event this happens, it shouldn't pose a significant issue to hold the bond as IG bonds are issued by companies or countries with a credit rating of Baa3 or higher from Moody's, or BBB- or higher from Standard & Poor’s and Fitch Ratings, indicating a low risk of payment default. They shall provide a consistent income stream and assure the return of the bond's face value at maturity.

[AI Translation]

• 今年，创纪录的大量资金涌入美国企业债券市场，因为投资者急于在美联储预期的一系列降息之前锁定多年来最高的收益率。根据基金跟踪机构EPFR的数据，2024年迄今为止，流入公司债券基金的资金已达228亿美元，这是自2019年以来首次出现开门红，当时流入的资金达224亿美元。
• 巴克莱评论说，从一些主要指标（净杠杆率、利息覆盖率、息税折旧摊销前利润率和速动比率）的五年滚动综合 Z 值来看，投资级市场在当时和现在似乎都没有任何令人担忧的重大特征。这两个时期之前都出现了经济衰退，公司在资产负债表上变得谨慎。这种缺乏基本面阻力的情况促成了利差的收窄，并有助于将利差维持在当前水平。
• 然而，尽管利差处于如此低的水平，一些投资者仍然担心全球最大经济体的健康状况，以及企业困境加深或违约增加的可能性--尤其是如果美联储没有实现市场预期的降息。事实上，债券的质量至关重要。至于推荐的行业，包括摩根大通和高盛在内的许多投资银行一般都偏好金融行业。根据惠誉评级公司（Fitch Ratings）的数据，自2023年11月以来，美国大型地区性银行信用评级基本保持不变，尽管评级缓冲较少。这些同行包括富国银行、摩根大通、高盛和花旗等，它们最近宣布没有严重的净息差（NIM）和融资成本问题。
• 对于债券挂钩票据，如果最终价格低于行权价，就有可能进行实物债券交割。如果出现这种情况，持有债券应该不会有太大问题，因为 IG 债券是由穆迪信用评级为 Baa3 或更高，或标准普尔和惠誉评级为 BBB- 或更高的公司或国家发行的，这表明支付违约的风险很低。它们应提供稳定的收入流，并确保在到期时返还债券面值。

Product Solution

• During the product tenor, you receive the yield derived from the Bond Linked Note, which is essentially an FCN without a KO feature.
• Much like the standard Bond Linked Note, if the final fixing price falls below the clean strike price, the bond's physical delivery would occur. However, there remains a slim possibility that the Issuer might NOT go for physical delivery—even when the price is below the strike—based on their financial discretion. In such instances, the client would still be at an advantage.

[AI Translation]

• 在产品期限内，您将收到由债券挂钩票据产生的收益， 其实就是一种没有KO功能的FCN。
• 与标准的债券挂钩票据类似，如果最终固定价格低于净执行价格，就会发生债券的实物交割。然而，即使价格低于执行价格，发行人根据他们的财务判断可能也不会选择实物交割，这种情况的可能性很小。在这种情况下，客户仍然处于有利地位。

Indicative Terms

Indicative only, subject to the confirmed level on the trade date

JPM latest US IG bond view:

Key Risks

• The product is not principal protected and is subject to market volatility and product issuer risk.
• In the case of physical delivery, the value of bonds received by investors may be lower than their initial investment amount. Investors may experience a total loss of capital in the worst case scenario.

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