J.P.Morgan On The Pre-FOMC Setup

J.P.Morgan note that "as we head into the Fed meeting, valuations are clearly rich: with their decline in recent weeks, 10-Year yields appear about 15bp low relative to the model-implied levels from our fair value framework, the largest divergence since early February. This points to asymmetric risk to higher yields, especially if the median 2023 dot shifts to show a hike. Meanwhile, our broad suite of indicators suggests that the bearish position in rates has been reduced over the past month: both macro funds and CTAs seem to have completely neutralized their duration shorts over the period. However, our Treasury Client Survey remains stubbornly short - both net and outright shorts are at their highest levels since the fall of 2017. How can we reconcile these differences? The survey merely asks 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, though much smaller in size than they were earlier this year. Yields remain vulnerable to a decline if the Fed delivers a dovish surprise tomorrow, but we think this will be limited somewhat by the rich valuations backdrop discussed above."