J.P.Morgan: Position For Wider 5-Year Sector Swap Spreads In A Rally

J.P.Morgan note that “5-Year sector spreads have been negatively correlated to yield levels, and are currently too narrow relative to this relationship. They are therefore likely to be biased asymmetrically wider in a rally. In addition, implied volatility levels in the swaptions and Treasury futures markets allow for the construction of forward bpv-neutral conditional spread wideners at zero premium and nearly at forward spreads.”

• As such they recommended “buying 1000 FVU2 Sep 111.75 calls vs. selling $111.7mn notional matched receiver swaptions. This package is initiated to be forward bpv-neutral and approximately premium neutral, and is expected to be profitable if the CTD's maturity matched swap spread is wider than -25.7bp in a rally at option expiry.”