The recent interest rate cuts by the Federal Reserve have led to a rebound in U.S. Treasury prices, although they still remain below long-term averages. According to Prudential Investment Management, there is still considerable room for growth in the prices of U.S. investment-grade bonds, which suggests that investors may find it an opportune moment to buy while prices are favorable as the trend of rate cuts continues.

Ping Huang, portfolio manager for PGIM’s U.S. investment-grade corporate bond fund, explained that most U.S. investment-grade bonds are issued by large corporations, resulting in relatively stable fundamentals and a positive credit outlook. However, prices have plummeted significantly since the Fed began its aggressive rate hikes in 2022, even dropping to a low of $84.03—over a 20% decline. Although prices rebounded following the Fed’s rate cut in September, the current price of $93 remains below the 20-year average, which Huang describes as a “bargain price” for investment-grade bonds.

Data indicates that the fundamentals of U.S. investment-grade bonds are improving. Huang noted that according to JPMorgan statistics, the ratio of credit rating upgrades to downgrades reached a record 5.2 times in the first half of this year, with $194 billion in bonds upgraded in the second quarter, compared to only $14 billion that were downgraded. This reflects a generally positive trend in credit ratings.

Huang projects that a soft landing for the U.S. economy is the baseline expectation. Coupled with strong corporate fundamentals, slowing inflation, and anticipated looser monetary policies, these factors are favorable for investor sentiment in the bond market. He noted that current strong technical indicators for U.S. investment-grade bonds suggest that net issuance will decline in the fourth quarter, allowing for a narrow range in spreads to remain stable for much of the time leading up to the end of the year.

In terms of sector selection, Huang is currently optimistic about the banking industry, highlighting its capability to manage potential increases in bad debt. He believes that higher capital requirements will benefit their credit positions. Additionally, he has a positive outlook on the energy sector, especially with crude prices expected to stay above $70 per barrel, supporting profitability for energy issuers and their deleveraging efforts. Regarding bond ratings, Huang advises focusing on BBB-rated bonds and watching for potential convergence opportunities in the spreads of what he calls “rising stars.”