J.P.Morgan Recommend Entering Short 5s

J.P.Morgan believe “the tactical outlook has turned somewhat more bearish for Treasuries for a few reasons.

• “The latest Fed statement and SEP were both more hawkish than we had expected. This guidance would indicate a relatively large market mispricing re: the Fed.”
• “Given the unprecedented speed of this year’s hiking cycle, there’s a growing concern, that given the long and variable lags with which policy operates, that there may be a non-linearity in the economy that results in a significantly weaker growth outcomes in 2023.”
• “Inflation is downshifting quickly: core services CPI ex- shelter was unchanged in November after a benign October reading. That being said, we are unlikely to see the same magnitude of softening in core services ex-housing component of PCE.”
• “Furthermore, we believe global policy dynamics lean somewhat bearishly over the near term.”
• “Valuations look rich, as the latest rally seems both early, and somewhat inconsistent with the fundamental drivers of Treasury yields.”
• “Taking into account all these factors, we think risks skew toward higher yields over the near term, and we recommend turning short 5- Year Treasuries.”