Late on Friday J.P.Morgan wrote “we think there is further room for the curve to flatten. This view is somewhat supported by prior work which found that though yields tend to peak in the months prior to the final hike, the curve tends to flatten through the end of the tightening cycle.”
- “In retrospect then, we regret unwinding our 10s/30s flatteners earlier this week. That being said, it’s not entirely intuitive to us that most front-end curve pairs have only now retraced to the cycle flats observed in mid-August, even though 2-Year yields have climbed nearly 90bp over the interim period.”
- “Indeed, given the strong relationship between these curve pairs and front-end yield levels, this suggests some flatteners may offer value.”
- “Flatteners with longs anchored in the 5- to 10-Year sector appear too steep when adjusting for front-end yield levels. As a result, we recommend adding 2s/10s flatteners at current levels.”
- The recommendation came at -51.8bp.