JPMorgan Cuts U.S. High-Grade Bonds on Europe Uncertainty

Strategists at JPMorgan Chase & Co. (JPM) lowered their recommendation on U.S. investment-grade corporate bonds to neutral from overweight, saying that uncertainty about Europe’s fiscal crisis will limit returns for the debt.

JPMorgan’s Eric Beinstein, head of the New York-based bank’s top-rated high-grade strategy team, said in a report today that the extra yield the bonds pay more than similar- maturity Treasuries is unlikely to tighten much in the next few months as the European situation weighs on investor demand. Beinstein still expects spreads to drop to 175 basis points by the end of the year, from about 200, he said.

“We believe renewed uncertainty in peripheral Europe will limit the ability of spreads to tighten meaningfully over the next couple of months,” Beinstein wrote in the report. That will counter expected positive developments in the Chinese and U.S. economies, he wrote.

Investors have been scooping up corporate bonds this year on optimism that borrowers will have an easier time meeting their debt payments amid signs the global economy is recovering. The extra yield, or spread, over Treasuries that investors demand to hold highly-rated U.S. corporate bonds fell to 201 basis points yesterday from 257 basis points at the end of last year, according to Bank of America Merrill Lynch index data.

Beinstein’s team ranked No. 1 for investment-grade strategists in Institutional Investor magazine’s annual poll.

To contact the reporter on this story: Zeke Faux in New York at zfaux@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.

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