J.P.Morgan: Initiate Conditional Exposure To A Steeper 1s/5s Swap Yield Curve In A Rally

J.P.Morgan recommend initiating “conditional exposure to 1s/5s swap curve steepening in a rally. As is well understood, short rates are a key driver of the slope of the swap yield curve. That said, the beta between this curve and short rates itself can vary, from significantly negative (when rates are well below neutral) to closer to zero recently.”

• “The rolling beta between weekly changes in the 3-month forward 1s/5s curve versus weekly changes in the 3Mx1Y yield has risen from considerably negative levels to near-zero, tracking the move up in yield levels. This suggests that the curve may not exhibit much directionality locally, but it is likely to steepen in accelerating fashion if short rates were to decline for any reason.”
• “Thus, conditional steepeners in this sector are natural to consider. In addition, implied volatilities are currently priced to positive betas, allowing such trades to be constructed better-than-forwards.”
• “Lastly, even slide is favourable as the 3M forward 1s/5s curve is about 7bp flatter than the spot curve. Therefore, we now recommend initiating conditional exposure to a steeper 1s/5s swap yield curve in a rally using 3M expiry receiver swaptions.”