J.P.Morgan Recommend Adding 3s/10s Steepeners

J.P.Morgan note that "looking ahead, we think a number of factors point to higher Treasury yields. First, the holiday surge in COVID-19 infections seem to be behind us, as the daily change in new cases has fallen approximately 40% from its peak in mid-January. Moreover, as our colleagues in technical strategy have found, hospitalization trajectories for all regions and the nation as a whole suggest that the US is now moving down the right side of its fall-winter outbreak curve. Certainly the rate of new infections remains high, but anywhere between 15-25% of the US population has likely been infected by COVID-19, and combined with the Biden administration's plan to increase the pace of vaccine delivery in the coming weeks, this should help further slow the spread of the virus. More vaccine news is due next week as well: Johnson & Johnson expects the initial data from its phase 3 COVID-19 vaccine trial by early next week, and the market-expected efficacy is in the 70-95% range."

• "Second, valuations have reverted and no longer appear cheap. Two weeks ago, 10-year yields had appeared approximately 1 standard deviation cheap relative to fair value, but with the decline from their highs, they now appear fairly valued after adjusting for their fundamental drivers."
• "Third, it appears positions are no longer aggressively short: our Treasury Client Survey shows the fewest net shorts since mid-December, and is no longer very short compared to its one-year average."
• "Net of these factors, with the outlook or COVID-19 turning more positive, valuations no longer cheap, and positions turning more neutral, we turn bearish on duration. We prefer curve steepeners over outright shorts in order to reduce the negative carry of these bearish positions and recommend adding 3s/10s steepeners."