J.P.Morgan Go Short 7s On 3-/7-/10-Year Butterfly

J.P.Morgan note that “while the combination of strong employment data and rich valuations have us leaning bearish on duration locally, we are respectful of the strong momentum in the move to lower yields as recession risks have risen further. Moreover, we recognize that seasonals are supportive of lower yields as well. August has been the strongest month of the year for duration returns in this century, offering positive total returns in 15 of the last 20 years and 3 of the last 5. It’s hard to explain the consistency of this seasonality, but perhaps market participants favor adding duration as liquidity conditions sequentially weaken into the latter part of the summer. Certainly, we’ve observed a significant amount of de-risking this year, corroborated by moves in the various investor positioning technicals we watch, but it’s notable that investors have used the recent decline in yields to turn bearish once again, as we observe in our Treasury Client Survey and Core Bond Fund Index. This positioning is by no means stretched, but it does leave us cautious before turning bearish in a highly illiquid time of the year.”

• “As a result, we favor looking at trades which have bearish exposure, but also offer relative value. Locally, the 7-year sector is flagging particularly rich.”
• “Thus, we recommend selling 7-year Treasuries against a 50:50 weighted 3s/10s Treasury butterfly as a way of positioning for higher yields with some relative value.”