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J.P.Morgan Note Divergence In 10s Vs. Fundamental Drivers

US TSYS

Late on Thursday J.P.Morgan noted that (today’s) “(data indicates the economy is slowing and would further justify the Fed moving on hold by early-2023, all else equal. However, the flattening of the Treasury curve seems at odds with this, running counter to the long-end steepening we’ve observed into other Fed on hold periods.”

  • “Given this backdrop, it stands out amid this large rally that intermediate Treasuries have diverged somewhat from their drivers: 10-year yields appear 22bp too low after adjusting for the market’s near-term Fed policy as well as medium-term inflation and growth expectations. These sorts of valuations would only be justified if OIS forwards priced in a terminal Fed Funds rate at least 30-40bp lower than current levels, or if TIPS breakevens narrowed 25bp from current levels. As a result, this is the largest divergence we have observed since late-August.”
  • They haven’t issued a trade recommendation on this observation.
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com

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