J.P.Morgan Recommend Long 5Yx5Y Inflation Swaps

J.P.Morgan note that in contrast to recent sessions, Thursday saw TIPS "underperform versus their nominal yield betas, especially at the long end of the curve, with benchmark breakevens narrowing an additional 3-4bp and inflation swaps declining a similar amount. With this move, 5Yx5Y inflation swaps are trading at 221bp, their lowest level since November and 20bp below levels observed just prior to the June FOMC meeting. This move does not appear justified by fundamentals, and the sector appears cheap at current levels in our view, especially given the release of the meeting minutes yesterday. While the hawkish shift in the June dot plot led market participants to question the Fed's commitment to its FAIT framework, the meeting minutes downplayed the importance of the dots, emphasized its reaction function was unchanged, and also trimmed the risk of an earlier-than-expected taper announcement. Over the last couple of days, the market-implied timing of liftoff and pace of tightening has moved in a dovish direction, and 1Yx1Y inflation swap rates are trading above pre-FOMC levels near 242bp. As we have discussed, since last fall, the shape of the inflation swap forward curve has been correlated with the level of 1Yx1Y inflation swaps and the shape of the OIS curve at the front end. However, with the recent moves, longer-run forwards appear cheap relative to the front end after adjusting for these factors. Against this backdrop, we recommend initiating tactical longs in 5Yx5Y inflation swaps."