J.P.Morgan Struggle To See Driver For Reversal In Breakevens

J.P.Morgan write that “the underperformance of TIPS has been pretty much one-way since the Jackson Hole symposium last month, though up until Thursday the moves in breakevens have been fairly orderly, even in recent sessions against the backdrop of a vol. shock in real and nominal yield space.”

• “The further decline in liquidity on Thursday appeared to accelerate the trend, particularly alongside a continued decline in risk assets: our model implies the probability of recession over the next 1 year, based on equity prices and credit spreads, has risen well above 80%.”
• “However, it is notable that the weakness in U.S. inflation markets on Thursday was not isolated to cash breakevens: inflation swap/breakeven basis has been remarkably stable over the past week, in contrast to the sharp widening observed in March 2020.”
• “Thus, despite cheap valuations, it is tough to say what could drive a reversal in performance, especially if hard landing fears are becoming more pervasive.”