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(Bloomberg) -- Beaten-down corporate bonds from automakers could rally after Wednesday’s tariff announcement from US President Donald Trump, making the debt an attractive purchase, according to JPMorgan Chase & Co.
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JPMorgan strategists don’t expect the announcement to be as detrimental for automakers as it will be for pharmaceutical companies.
“We don’t believe any of the large automakers are likely to get downgraded to high yield in the coming months,” strategists including Eric Beinstein, Nathaniel Rosenbaum and Evan Piascik wrote in a note Wednesday. “As such, in the scenario where today’s announcements become a clearing event, autos have room to rally.”
The autos sector is trading at its widest level versus the JPMorgan US Liquid Index (JULI) since July 2020 and is the worst performing major sector, according to the note. Meanwhile, the spread gap between the auto and the pharma sectors is now 0.52 percentage point, or 52 basis points, the widest since December 2023.
That seems extreme on a relative valuation basis, the strategists added. Spreads on automaker bonds would need to widen another 35 basis points to wipe out excess returns — or gains over Treasuries — for the next 12 months from a spread break-even standpoint. While not impossible, this would take the sector to levels concurrent to where BB bonds — one of the safest tiers of junk bonds — were trading as recently as late February, according to the strategists.
Manufacturers likely to be impacted the most include General Motors Co., Stellantis NV, Hyundai Motor Co. and Nissan Motor Co., based on their exposure to finished light-vehicle imports, according to JPMorgan. A 25% tariff on all US auto imports — and 45% for auto imports in China — plus a 50% pass-through to customers would result in roughly $1 billion to $4.4 billion in annual impact to each of the manufacturers’ earnings before interest and taxes, the strategists estimate.
Meanwhile, bonds issued by pharmaceutical companies don’t appear to be particularly well-positioned from a macro standpoint, given that a significant portion of pharmaceutical ingredients are imported from countries like India, which are likely to be a focus of reciprocal tariffs. The sector could be a good way to hedge, the strategists added.