J.P.Morgan Recommend 5/30-Year Flatteners

Late on Wednesday J.PMorgan noted that “the curve has displayed outsized volatility over the last month, driven mainly by shifting Fed expectations, but also exacerbated by poor liquidity as well as dealer hedging activity associated with yield curve range accrual notes and other similar curve gamma positions. As yields have declined from their highs and markets have priced a less hawkish path for the Fed in since late last week, the steepening of the curve seems in excess of what we would expect: The 5s/30s curve appears about 7bp too steep given the level of 2-Year yields, one of the larger divergences we have observed over the last six months. Over the medium term, we think high pension funded ratios will spur strong LDI demand and, combined with the Fed’s still-high share of the Treasury market, this will help better anchor the long-end, resulting in a still-flatter curve in the coming months. Thus, given this backdrop and that flatteners are a more efficient way of positioning for higher yields and a flatter curve, we recommend initiating 5s/30s flatteners at current levels”

• They recommended entering at 15.1bp, with one-month weighted carry of -3bp and roll of 0bp.