•Moving to Hold/Marketweight — We are moving to a Hold/Marketweight from Buy/Overweight on the JP Morgan 6.3s of 2019 (senior bonds), which now trade at Treasuries plus 114 bp. We are changing our recommendation only because the valuation has become less attractive.
• Levels No Longer Compelling — In early February 2010, the bonds were trading at Treasuries plus 135 bp. This month the bonds have rallied and are approaching the tights of early January 2010 (Treasuries plus 100 bp), which was a level we considered priced for perfection.
• Keeping Buy/Overweight on TRUPs — We are maintaining our Buy/Overweight on the JP Morgan 7s of 2039 (TRUPs), even though their spreads have compressed by 25 bp, to T+215 bp from T+240 bp, since March 1, 2010. Although the TRUPs’ valuation has become less attractive, they benefit from a scarcity value (few financials have issued TRUPs recently). They also offer investors a 6.7% yield for a very strong credit, which is difficult to find in today’s market.
• Strong Fundamentals — JP Morgan is one of the strongest, if not the strongest, banks in our coverage universe, in our view. The company could generate normalized earnings in the $22-$24 billion range in 2012, we believe, based on earnings estimates prepared by our equity research colleagues.
JP Morgan Chase & Co Moving to Hold/Marketweight on Seniors Because of Valuation $JPM
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