J.P.Morgan Outline The Lie Of The Land Post-FOMC

In lieu of Wednesday’s FOMC J.P.Morgan write “it makes sense that the Treasury curve bullishly steepened, but we are hard pressed to chase this trade and add duration here, for a number of reasons.”

• “First, markets are discounting a strong dovish response.”
• “Second, the move in aggregate over the last two weeks already matches what we typically observe around the end of a Fed tightening cycle, albeit earlier relative to any other tightening cycle over the last 25 years.”
• “Balancing these factors, we don’t recommend adding duration at current levels, but we certainly recognize yields could overshoot to the downside in coming days, particularly given that investors are not aggressively long duration.”
• “Meanwhile, we continue to hold 10s/30s steepeners as a medium-term position around the end of the cycle. As we’ve written in the past, 10s/30s tends to trade in a range in the last months of a hiking cycle, only to steepen 15-20bp once the tightening cycle concludes. Now, this curve is certainly at the steep end of the range it has held for the last 6 months, and we could argue that more steepening is likely to be limited over the near term, but we believe there is an asymmetric bias on this curve as we approach the final expected rate hike in May.”