JPM's Michele says credit spreads could halve

J.P. Morgan global CIO of fixed income Bob Michele believes the current environment for bond investors is the best in his 30-year career, as borrowers display an unprecedented commitment to repay debt.

Michele, who oversees $109bn in fixed income and currency assets, says all the recent government and corporate actions have been designed to facilitate the payback of debt.

"Over the course of 30 years it has always been a ‘cat and mouse' game about lending client money to borrowers and trying to gauge how aggressive they are going to be with this money," he says.

"Are companies refinancing higher coupon debt, making an acquisition or spending on cap-ex? Is a government about to restructure or default? For the first time in 30 years, everyone is committed to paying you back. Everyone is a good global citizen now.

"We can talk about peripheral Europe, but it is also in the banking system where the central banks in Europe have opened up counterparty and swap agreements with the local banks to the extent that any of the local central banks become overrun, they can turn to the Fed and other non-European central banks for help. I have never seen anything like it."

Michele says this is creating a credit friendly environment and could result in spreads halving from current levels.

"What this tells me, in addition to interest rates remaining low, credit looks attractive - in both investment grade and high yield," he says.

"It is no surprise corporate cash is at such high levels. Companies do not feel like they want to spend, they would rather preserve their credit ratings and minimise and rollover risk and liquidity concerns they may have. It is a great time to be a bond investor."

Michele says the volatility in government bond markets is also set to continue.

"Government bonds are in a trading range. What we have seen over the past month is the lower end of this trading range," he adds.

"The market seems to have got overbought and too concerned about the possibility of a double dip. Now we are pushing higher in yield as some of the buying in government bonds is being unwound.

"Government bond yields will swing between overbought and oversold, but I do not believe there is a trend that is going to be in place for the next year."

See a full Q&A with JPM bond chief Bob Michele in next week's Investment Week magazine.