JPMorgan Asset Buys Bonds Mulling Fed at Zero, Return of ECB QE

(Bloomberg) -- JPMorgan Asset Management is buying Treasuries and Italian bonds betting the Federal Reserve will cut interest rates multiple times this year and European policy makers will resume quantitative easing.

The $1.7 trillion money manager is snapping up U.S. five- and 10-year notes as it predicts slowing inflation and global trade tensions will convince the Fed to lower its benchmark by 75 basis points this year. Italian bonds will be one of the major beneficiaries if the European Central Bank restarts debt purchases, said Seamus Mac Gorain, head of global rates in London.

“The dovish backdrop comes from inflation but the trade war makes the cuts far more immediate,” Mac Gorain said in an interview. “We don't really need to see any further escalation in the trade war for central banks to cut.”

Bonds are rallying around the world as slowing growth drives down inflation and enhances the value of fixed-income assets. The Fed said last month it was ready to lower rates due to increasing global uncertainties, while the ECB has been edging closer to adding monetary stimulus as manufacturing slumps. Economists are expecting the Bank of Japan will also increase accommodation.

Treasury 10-year yields will probably fall to 1.75% by the end of December as the Fed makes a succession of rate cuts, starting with one this month, Mac Gorain said. U.S. benchmark notes yielded 1.95% on Friday, having dropped from as high as 3.26% in October.

“One of the questions we ask ourselves is: Is the Fed going to get back to zero in the cycle?” Mac Gorain said. “It is possible they could do, but I think it's not clear as yet. It really depends on how the economy evolves.”

Traders are awaiting pivotal monthly payroll data Friday to get an insight into whether the Fed will cut interest rates for the first time in more than a decade at its July 30-31 meeting.

Italy Attractive

JPMorgan has turned constructive on shorter-maturity Italian bonds, including five-year securities, in a bet they will be boosted as the ECB resumes debt purchases.

“We expect QE to come in the coming months, and that's very, very supportive for Italy in particular,” Mac Gorain said. The most likely date for QE to restart is September, he said.

Italy's two-year yields dropped below zero this week for the first time since May last year, while 10-year yields slid to 1.56% on Thursday, the lowest since October 2016. Even after their recent declines however, they remain among the highest in the euro area.

Here are some of Mac Gorain's other investment views:

Spanish Rally

• “We could easily go to zero in 10-year Spanish yields in the coming months”
• “The first big driver is the fact that negative yields are here for an extended period, the second is QE”
• “QE is more positive for the slightly riskier issuers and also for the longer-duration bonds”
• NOTE: Spain 10-year yields slid to a record-low 0.204% on Wednesday

ECB Succession

• “If Christine Lagarde is confirmed she'll be a very good appointment”
• “She's always been pragmatic, and also she's talked about the European policy makers using policy more proactively to boost growth
• READ: Lagarde to Succeed Draghi as ECB Chief as Economy Weakens

Trade War

• “Our central expectation is that it will be a prolonged drag on growth, that it will push global growth below trend”
• “We have to acknowledge there have been many unpredictable developments in the trade war this year and there could be more to come”

--With assistance from Masaki Kondo.

To contact the reporter on this story: Ruth Carson in Singapore at rliew6@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Nicholas Reynolds, Liau Y-Sing

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