J.P.Morgan Recommend 10-/30-Year Flattener

Late on Friday J.P.Morgan noted that “10-Year Treasuries far outperformed the moves implied by changes in market-based Fed policy, inflation, and growth expectations, and now appear 10bp too low against these drivers. Thus, with markets well-priced for a downshift in the pace of hikes, the near-term data flow unlikely to change Fed policy expectations materially, and valuations somewhat rich, we choose not to chase this rally, much like we did not chase the last part of the move to higher yields in October. As a result, we recommend a neutral stance on duration.”

• “However, within these contours, we think trades with bearish biases offer value here. 10s/30s has outpaced the rest of the curve, steepening 15bp, and moving back to its steepest levels since late-August.”
• “Now intuitively, this makes sense, as the long end tends to anticipate shifts in Fed policy, while the front end of the curve lags and reacts to policy changes. However, it’s notable that the curve has far exceeded the steepening we would expect given repricing of Fed expectations.”
• “The long end appears about 15bp steep after controlling for these fundamental drivers. As a result, we recommend adding 10s/30s flatteners as a tactical bearish trade with a strong relative value overlay.”