JPMorgan Warns Europe’s Bond Investors About a World Without QE

Updated on
  • As survey predicts more ECB easing, JPM looks further ahead
  • It recommends cutting positions in peripheral euro-zone bonds

While economists may be expecting the European Central Bank to extend monetary stimulus as soon as this week, JPMorgan Chase & Co. is already looking ahead to the end of quantitative easing -- and warning investors to position for a correction in bond yields.

“The circumstantial evidence is building” that ECB easing is reaching its limits, John Normand, JPMorgan’s London-based head of foreign-exchange, commodities and international rates research, said in a note Monday.

JPMorgan says this may push debt yields up from record lows. Over the past three weeks, “we’ve been positioning selective in trades that benefit from a gradual rethink” in policy, Normand said in a separate note last week.

He recommends investors cut overweight positions in the bonds of Europe’s peripheral nations, predicting that spreads with benchmark debt could widen by as much as a percentage point. He also advocates buying so-called curve steepeners, which would profit if longer-dated bond yields climbed by more than those on shorter-term debt.

Consensus View

The end of QE isn’t at the forefront of most economists’ minds. About half of respondents to a Bloomberg survey conducted last week foresaw an expansion of stimulus when it sets policy on Thursday, with nearly all the others predicting an announcement at the October or December meetings.

Data this week are underpinning that view. Spanish bonds advanced while German bunds halted their decline from Friday as surveys published on Monday suggested the euro-area economy lost momentum in August, largely due to a slowdown in Germany.

“The survey data will fuel expectations that the ECB would prefer not to wait before injecting more stimulus into the economy,” said Chris Williamson, chief business economist at IHS Markit. Policy makers will be under pressure “to act later this week to help shore up confidence in both the outlook for the economy and the bank’s commitment to its inflation target.”

The yield on German benchmark 10-year bonds was little changed at minus 0.048 percent as of the 5 p.m. close in London, having risen three basis points last week. The zero percent security due in August 2026 was 100.482 percent of face value. It touched a record-low yield of minus 0.205 on July 6.

The yield on similar-maturity Spanish bonds fell two basis points, or 0.02 percentage point, to 1.01 percent.

Years of relatively low interest rates and bond purchases have suppressed debt yields in the region, with those on 10-year bunds falling below zero for the first time in June. The yield will rise to zero percent by the end of this year, according to the median of analyst forecasts compiled by Bloomberg.