J.P.Morgan On The Recent Rally, Highlighting Divergence Vs. Fair Value

J.P.Morgan note that "though the data flow since late last week came in weaker than consensus expectations, the 10+bp decline in 10-Year yields since Friday morning seems outsized all considered. Indeed, medium-term market-based inflation expectations have barely budged the last two days (even with crude prices down 2% on Tuesday), and the market-implied timing to Fed liftoff has moved little as well. Thus, net of these factors, Treasuries have diverged further from our fair-value framework. Though yields tend to mean revert with relatively low frequency, 10-Year Treasury yields now appear 25bp too low relative to their drivers, a 3-standard deviation divergence, and the largest such deviation since the early fall 2020. Thus, we continue to think that position technicals are exaggerating the moves in Treasury yields as of late: our weekly Treasury Client Survey has remained short relative to average levels over the last year, and we will be interested to see how positions have evolved when the next survey is released tomorrow morning. Separately, the release of the June FOMC meeting minutes will be illustrative: it's our sense the leadership is not represented in the 7 participants who have forecast a hike in 2022, and we will look for confirmation in the minutes. We will also look for more clarity on how the FOMC defines "substantial further progress" as we progress toward a potential taper announcement later this year. Finally, we will be interested to see if there is broad based support to taper MBS more aggressively than Treasuries. We do not think this view is widely held by the Committee and we expect the Fed to taper Treasuries in a 2- to-1 ratio to MBS, proportional to the pace of purchases."