J.P.Morgan Maintain Preference For 5s30s Steepening Despite Reversion Towards Fair Value

J.P.Morgan write “despite the repricing earlier this week, the front end has remained remarkably well anchored over the last two weeks, while it’s been the long end that has borne the brunt of underperformance.”

• “We think some of this is due to mean reversion: last month we highlighted that the long end had appeared too flat after controlling for its fundamental drivers, implying the curve hadn’t steepened as much as it should have as yields repriced lower.”
• “With the moves we’ve had over the last two weeks, the curve has mean reverted considerably, and the residual relative to our fair-value framework has been cut in half.”
• “Nevertheless, to the extent the curve consistently steepens into the first Fed ease, and some relative value remains, we recommend maintaining 5s/30s steepeners, though we recognize the speed of steepening is likely to slow given the considerable mean reversion that has occurred in the first three weeks of January.”