J.P.Morgan Book Profit On Short 5s & Turn Neutral On Duration

J.P.Morgan note that “even with today’s retracement, intermediate yields have risen more than 30bp since we turned bearish on December 16.”

• “Looking ahead, we do not see near term-catalysts that justify holding on to duration shorts at current levels, for a number of reasons.”
• “First, though the money market curve has not disinverted, OIS forwards are pricing in a shallower pace of Fed easing in H223 than they did late last year.”
• “Second, we do not see global factors leaning as bearishly as they did a few weeks ago: Treasuries have performed in line with their DM government bond peers in the move to higher yields and there are no significant central bank events over the coming weeks.”
• “Third, while valuations had appeared relatively rich in mid-December, Treasuries now appear fairly valued after controlling for Fed expectations, medium-term inflation and growth expectations, as well as investor positioning.
• “Finally, while there is a slew of first-tier data due out this week, we look for 200K in nonfarm payroll growth and forecast the unemployment rate held steady at 3.7% in December, both in line with consensus expectations. Against this backdrop, we recommend taking profits on shorts in 5-year Treasuries and turning neutral on duration.”