J.P.Morgan Enter 30-Year Swap Spd Widener, Hedged With S&P 500 Futures

J.P.Morgan suggest the “at the long end of the curve, we recommend tactically positioning for wider 30-Year swap spreads, but hedged for the level of equities. We have frequently noted that long end spreads are perhaps the most sensitive to risky assets and equity valuations in particular. This is because the actions of the two major long end investor classes - pension funds and insurance companies - are dependent on equity levels. With respect to pension funds, our nowcast for the aggregate surplus of the top 100 pension funds remains in positive territory thanks in part to the recent rebound in stocks, and conditions thus remain conducive to a continuation of long end asset demand (supporting wider spreads) from these investors.”

• “Similarly, the duration demand from insurance companies hedging variable annuity books falls as equities rise - this too works to pressure spreads wider when equities rise as the duration is predominantly managed in the swaps market. Thanks in part to these effects, changes in 30-Year maturity matched swap spreads have been well correlated to the S&P 500 index, with a beta of about 0.015. But notably, long end spreads have lagged the move in stocks, and appear narrow adjusted for the level of the S&P 500 index. Therefore, we recommend adding 30-year swap spread wideners hedged with a weighted short in S&P 500 E-mini futures.”
• The recommendation came at an entry point of -54.7bp in the 30-Year swap spread and 4,133.25 in ESU2 futures.