J.P.Morgan: A bond friendly macro setup that awaits policy help

Ahead of 2022 J.P.Morgan note that “a slow-burn duration rally in 2021 was directionally consistent with softer activities but the magnitude of the move was small relative to the extent of the growth downgrades. The was attributable to a less responsive PBoC, guided by a shift to the “cross-cycle” policy framework, a regime change that has led to contained volatility in CNY rates, which could persist. A negative output gap next year alongside a likely prolonged recovery in the property sector, however, should at least motivate the PBoC to turn more growth supportive at the margin, a macro and policy setup that is fundamentally bond friendly.”

• Against this backdrop, they head into 2022 “long 3-Year CGBs outright to position for risks of lower rates in the near term. After all, PBoC over-delivery is a more realistic risk in H1 vis-à-vis H2 as the Chinese central bank’s hands could become tied towards the latter half of next year should the real estate weakness peak alongside a projected Fed liftoff and a pick-up in consumer inflationary pressures.” They also “remain Overweight CGBs in EM, expecting the relative resilience in CNY rates this year to carry over into 2022 in lightly of continued monetary policy divergence between the PBoC and RoW.”