J.P.Morgan Recommend Longs In ’25 Breakevens

J.P.Morgan see “the prospect for higher front-end yields in Australia as more an inflation, than real yield phenomenon, reflecting the constraints of an only-gradual return to the target.”

• They note that “on our forecasts, AUD headline inflation should hold above 3.5%oya next year. The underlying level of inflation which best predicts year-ahead headline is in the high 3s.”
• “The most recent, weaker than forecast October CPI indicator showed signs of moderation alongside US/EU prints, but the narrowing pressure across Australia’s breakeven curve in the past month has nevertheless overextended vs fundamentals at the short end of the curve.”
• “The 2025 breakeven is now at 2.9%, 20bp narrower than a month ago. In the past year we have been tactical buyers of front linkers on retracements and we once again regard current levels as attractive for longs.”
• “The October monthly CPI outcome in particular shouldn’t be extrapolated since it captured rental and electricity subsidies that lowered household out of pocket expenses in that month.”
• “This effect will dissipate in November and we expect rental inflation, to rebound. It’s also worth remembering that seasonality for the monthly CPI indicator is strongest in December with this print released alongside the quarterly outcome. Enter longs in the 2025 breakeven at 2.90%.”