J.P.Morgan Suggest Taking Profit On 3-/10-Year Steepeners

J.P.Morgan note that "though yields have declined 8-10bp from their local highs over the past day, we recommend taking profits on 3s/10s steepeners, for a number of reasons. First, valuations remain somewhat cheap, as 10-year yields appear 12bp high relative to their fundamental drivers. To be fair, our model mean reverts with relatively low frequency, but 10-year yields now appear approximately 1 standard deviation cheap relative to fair value, the largest divergence since late October. Second, auction cyclicals indicate the curve tends to flatten following the mid-month long-duration auctions: with 30-year supply digested easily, there is room for the curve to flatten and yields to decline over the second half of this month. Third, demand for long-duration Treasuries has increased recently: net stripping activity totaled $4.2bn in December, the fastest pace since January 2020. The latest Milliman data show the average funded ratio for the largest 100 DB funds increased to 88.2% as of year-end. Given the moves in equities, yields, and credit spreads YTD, our nowcaster places the funded ratio at 90%, near the highest levels since mid-2019. We think this should lend itself toward renewed asset allocation from equities into fixed income. Hence, while we still look for yields to rise and the curve to steepen further over the medium term, we turn neutral on the curve for now and look for better location to enter steepeners."