JPMorgan's Tariff Day Trade Goes Long on Automaker Bonds

JPMorgan Chase & Co. analysts suggest that the struggling corporate bonds of automakers could see a rebound following U.S. President Donald Trump’s tariff announcement on Wednesday, making them a potentially attractive investment. According to the bank’s strategists, the impact of the tariffs is expected to be more severe for pharmaceutical companies than for automakers.

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In a note published Wednesday, strategists including Eric Beinstein and Nathaniel Rosenbaum expressed confidence that major automakers are unlikely to be downgraded to high-yield, or junk, status in the coming months.

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They stated that if the market views the tariff announcement as a clearing event, automakers’ debt has the potential to rally.

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At present, the auto sector is trading at its widest spread compared to the JPMorgan US Liquid Index (JULI) since July 2020, making it the worst-performing major sector.

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The note also highlighted that the gap between auto and pharmaceutical bond spreads has reached 52 basis points (0.52 percentage point), the widest differential observed since December 2023.

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JPMorgan’s strategists believe this level of divergence appears excessive when considering relative valuations. They explained that for automaker bond spreads to erase the sector’s excess returns—essentially, their gains over Treasuries—for the next year, they would have to widen by an additional 35 basis points.

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While this scenario is not impossible, it would push auto-sector bonds to levels comparable to where BB-rated bonds, which are among the highest-rated junk bonds, were trading as recently as late February.

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Meanwhile, the pharmaceutical sector may not be in a particularly strong position from a macroeconomic perspective, according to JPMorgan’s strategists. A significant portion of pharmaceutical ingredients are imported from countries such as India, which could face retaliatory tariffs. This exposure to potential trade tensions makes pharmaceutical bonds a possible hedge against broader market risks, the analysts noted.

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With automakers’ bonds trading at historically wide spreads relative to their past performance and to other sectors, investors might find opportunities in these beaten-down securities. The assumption underlying JPMorgan’s view is that the auto industry will not face credit rating downgrades in the near term, allowing bond prices to recover if market sentiment improves.

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The bond market has been closely watching U.S. trade policies, as tariffs have the potential to reshape supply chains and impact companies’ cost structures. While auto manufacturers are not immune to these effects, their bonds have already been under pressure, and a relief rally could occur if investors perceive the current situation as overdone.

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On the other hand, pharmaceutical bonds may experience more difficulties, as higher costs from potential tariffs on imported ingredients could weigh on profitability. Unlike automakers, which are already trading at distressed levels, pharmaceutical companies might face fresh headwinds that could make their bonds less attractive relative to other sectors.

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Overall, JPMorgan’s analysts suggest that while auto bonds appear undervalued and have room to rebound, pharmaceutical debt may be more vulnerable to further declines. Investors looking for opportunities in the corporate bond market may consider the auto sector’s potential upside while being cautious about exposure to pharmaceutical debt.

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