J.P.Morgan On Market Set Up Into NFPs

Ahead of Friday's NFP print J.P.Morgan note that "while Treasury yields were relatively stable following last month's disappointing release, we think it's worthwhile to explore the risks around the Treasury market following tomorrow's data. Interestingly, valuations and positions offer conflicting messages on the potential direction of travel in yields following tomorrow's release. Treasury yields are in line with average levels observed over the last two months, but appear somewhat too low after adjusting for medium-term growth and inflation expectations, as well as Fed policy expectations. Meanwhile, investor positioning leans bearishly. In aggregate, most of the main positioning indicators we track closely indicate a small bearish position in duration at the moment. However, our Treasury Client Survey shortened further this week, to levels last seen in the fall of 2017, when the Fed was steadily raising rates at a clip of 25bp per quarter. How can we reconcile these differences? The survey merely askes clients about their duration exposure each week, and gives no indication about the magnitude of that position. Thus, it appears that bearish positions in duration are pervasive, albeit small. Balancing these factors out, with rates in the middle of their recent range and positions somewhat short, we think the bigger risk is that yields decline back to the low end of their recent range in the event the data disappoint relative to expectations."