The Fed's sharp rate cut intensifies valuation anxiety, investors flock to corporate bonds.

Investors are pouring a large amount of money into corporate bonds, tightening risk premiums gradually. The rate cut by the Federal Reserve has reignited hopes in the United States to avoid a recession. At the same time, some fund managers have expressed concerns that the market is too complacent about worrying factors. Simon Matthews, Senior Portfolio Manager at Neuberger Berman, said: "The U.S. election is nearing, and expectations for German economic growth are the weakest since before the COVID-19 pandemic, consumers are feeling tight on cash, and economic growth in China is slowing down. When you consider all these factors together, it doesn't tell you that credit spreads should have already peaked." He added that lower borrowing costs could help alleviate some negative factors. Investors have been overlooking potential negative factors and delving into the riskiest areas of credit to seek higher yields. Bonds with the lowest ratings are currently outperforming the overall junk bond market, and there is expected demand for Additional Tier 1 bonds that may force investors to incur losses to help banks navigate the volatility. Buyers are betting that lower borrowing costs will allow highly indebted companies to refinance and postpone debt maturity, thus limiting defaults and supporting valuations. As short-term interest rates decline, investors are expected to reallocate funds from the money market to medium and long-term corporate bonds, which could further narrow spreads. However, Hunter Hayes, Chief Investment Officer at Intrepid Capital Management, said that if consumers start spending more as interest rates fall, inflation could start rising again. He said, "Who knows, maybe the federal funds rate will go back to inflationary levels like it did before, and suddenly, the attractiveness of high-yield bonds will take a hit." Research analysts Amanda Lynam and Dominique Bly from BlackRock wrote in a report that due to the possibility of the U.S. maintaining restrictive monetary policy, market participants are also watching for signs of worsening fundamentals, especially for borrowers with floating rate bonds. Additionally, issuers rated CCC continue to face pressure overall, despite their bonds performing well recently. They pointed out that these companies have lower overall profit levels compared to interest expenses. The borrowing costs for CCC-rated companies are still around 10%, which is a heavy blow for some small companies that must refinance after the end of easy money times, even with a rate cut, they still have default risk. Analysts from J.P. Morgan, including Eric Beinstei and Nathaniel Rosenbaum, wrote in a research report last week that any weakness in the labor market will "be negative for spreads, as it will increase concerns about an economic recession and lower yields." It is certain that valuation concerns are still moderate, and investors are largely increasing their holdings in corporate bonds. Analysts from BNP Paribas wrote in a report that the beginning of a rate cut cycle is expected to provide more support for non-cyclical bonds in the investment-grade market than cyclical bonds. They added that limited issuances, especially from healthcare and utility companies, provide room for spread compression. Meghan Robson, Head of U.S. Credit Strategy at the bank, said in an interview: "This is a great opportunity for non-cyclical investors to outperform the market, while cyclical bonds are overvalued."