J.P.Morgan Take Profit On 3-/10-Year Steepners

J.P.Morgan note that with intermediate and long-end yields now 25-30bp off their local lows in late January, we recommend taking profits on 3s/10s steepeners.

• "With the recent move in yields, the market has brought its expected timing for Fed liftoff from January 2024 to August 2023. Under the Fed's flexible average inflation targeting framework, the Fed will not liftoff until labor markets have tightened to maximum employment, inflation has risen to 2% and is on track to run above 2% for some time. To that end, the minutes of the January FOMC Meeting were dovish. Meeting participants noted that the economy is "far from" the flexible average inflation targeting goals laid out last September. Thus, with Vice Chair Clarida indicating core PCE would need to run at 2% for a year before considering liftoff, and the tapering process likely to take a year, it will be difficult for the markets to price in an earlier liftoff, which will make it more difficult for yields to move much higher over the near term."
• "Valuations appear cheap. 10-year yields appear 24bp high relative to their fundamental drivers. To be fair, our model mean reverts with relatively low frequency, but 10-year yields now appear nearly 2 standard deviations cheap relative to fair value, the largest divergence since last March."
• "Position technicals are short: while net longs in our Treasury Client Survey rose from to -14 this week from -20 last week, the survey remains at the shorter end of the range observed over the last year. Consequently, any short covering could drive yields lower from current levels."