J.P.Morgan Receive 10-Year EFP

J.P.Morgan have noted that “the widening trend in 10-Year EFP has continued unbroken despite the RBA’s exit from QE now being well-established, and net supply to the market having shifted up since early 2022. Some portion of this can be explained by the flatness of the bond curve, the increase RMSE measures, and to a lesser extent, wider credit spreads.”

• “Given these are all late-ish hiking cycle dynamics, they also hark back to conditions in 2007/08. After a burst of rate hikes, banks probably expect a slowing in credit growth, and so loan-to-bond rotation on their asset base. This raises the fair value of longer end swap spreads via banks’ paying as a precursor to late-cycle curve steepening, and asset swapping.”
• “Still, while the broad direction is understandable, 10-Year spreads have become too wide vs curve shape. Moreover, incorporating other related factors, including the widening in credit, and other variables, 3-Year and 10-Year EFP are more than 20bp, and 30bp too wide respectively, to fitted values”
• “We enter a received position in 10-Year EFP a spread of +71.75bp.”