Italy, Spain Are JPMorgan's Answer to Yields in Europe

  • Head of fixed income in asset-management unit likes periphery
  • Capital requirements make banks `bullet-proof' borrowers

J.P. Morgan Asset Management says investors turned off by the euro area’s $1.8 trillion of negative-yielding debt would be wise to not give up on the region’s bonds.

With the European Central Bank committed to its accommodative monetary policy while also tightening capital requirements for financial institutions, investors should consider peripheral sovereign borrowers and the region’s banks, said Bob Michele, who heads global fixed income at J.P. Morgan Asset Management, which overseas $1.7 trillion.

“I like what’s going on in Europe,” New York-based Michele said in an interview on Bloomberg Television. “Bonds there look cheap and I think there’s good value if you hunt around for it.”

Examples of bond opportunities in Europe include Spain and Italy, where investors in 10-year government debt are getting paid one percentage point more in yield compared with German bunds, Michele said.

“If you know the ECB is willing to step up the amount of accommodation, why not look across Europe, why not look at the intermediate part of the curve?” Michele said. “You can buy Italy and Spain.”

Five-year government debt was yielding 0.67 percent in Spain and 0.53 percent in Italy as of 8:15 a.m. London time. This compares to minus 0.07 percent in Germany.

Bonds issued by Europe’s banks are also attractive as regulators are requiring that they raise money, with proceeds to be held as part of their capital base, which will improve credit quality, Michele said.

“If I know they’re raising debt and it’s just going to sit in capital for them and they’re not really going to lend it out or extend credit through the system, then that makes sense for me,” Michele said. “They’re effectively becoming bullet-proof.”

(An earlier version of this story was corrected to remove repetition of ‘trillion’ in first paragraph.)

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