J.P.Morgan Assess Wednesday’s Flattening

In the wake of Wednesday’s price action J.P.Morgan note that “taken at face value, the curve’s twist flattening alongside a bond auction results indicate June CPI represented significant event risk for the markets and with this uncertainty out of the way, gave a green light for end users to add duration. We also think it signals strong Fed credibility: with rate hikes being front loaded and the peak of the OIS curve moving into 2022, it indicates a strong likelihood this record-paced hiking cycle will be enough to slow demand and hence bring inflation back down to more normal levels. On that note, the 2s/10s curve garnered interest today, as it moved to the most deeply inverted levels since the fall of 2000, just months before the onset of a recession and an aggressive Fed easing campaign. It certainly continues to flag that monetary policy is expected to move into restrictive territory, but we remain more focused on the “near-term forward spread” when considering recessionary risk. This curve has flattened 125bp over the last month and is now sitting at levels that persisted for most of 2015-2018. Recall, this is a better recession gauge than the longer-term spread and any further significant flattening would certainly raise the risk of a near-term recession.”