J.P.Morgan Recommend 2s/5s Spread Curve Flatteners

J.P.Morgan write “with the recent widening, we now think belly spreads look too wide to fair value and we are now biased towards narrowers in this sector.”

• “In the front end of the curve, we continue to think spreads have room to widen as they look too narrow to fair value.”
• “In addition to fair value considerations, there are two other reasons for this view. First, MMF AUMs have continued to increase in April, albeit at a slower pace, and should keep RRP elevated given that the RRP is the most scalable marginal opportunity available to MMFs. As we have noted in the past, a higher RRP balance is supportive of wider front-end spreads. Second, our economists look for another 25bp hike in May, and higher front-end yields are supportive of wider front-end spreads as well.”
• “One currently efficient method of positioning for wider front-end spreads is via 2s/5s spread curve flatteners. The 2s/5s spread curve is well-correlated to 2-year swap spreads and currently looks mispriced by 2bp and should flatten if 2-year spreads widen. Additionally, we are biased towards narrower in the belly as we noted earlier, which would also support a flattening of the 2s/5s spread curve. Therefore, we recommend initiating 2s/5s spread curve flatteners.”
• The spread at the inception of the recommendation sat at 25.6bp.