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J.P.Morgan Take Profits On 1Yx1Y Inflation Swap Longs And Turn Neutral

US TSYS/TIPS

J.P.Morgan note that “5-Year breakevens remain roughly 20bp wider over the past month, net of carry. While we continue to think that the front end of the inflation curve is likely to be biased somewhat higher over the near term, we take profits on our 1Yx1Y inflation swap longs and turn neutral for a number of reasons. “

  • “First, the widening in front-end breakevens in recent weeks occurred even as broad commodity prices have declined and high-grade credit spreads have reversed somewhat wider. Thus, the residual on our 5-year breakeven model has been reduced significantly.”
  • “Second, the material repricing in Fed expectations appears to now be weighing more heavily on risk assets, especially alongside the pick-up in volatility and uncertainty around the preconditions that could lead to a Fed pause. Any further widening in credit spreads could drive an increased liquidity premium in front-end breakevens.”
  • “Third, we previously argued that commodity prices could be supported over the near term by the China reopening, OPEC+ production cuts, and a move by the U.S. administration to replenish SPR reserves. However, with China reopening occurring earlier than we had projected, there is no longer a need for OPEC+ to reduce production quotas this year, and we also now assume higher prices will prevent U.S. administration from repurchasing oil for SPR this year and next. Thus, it’s more difficult to identify a near-term catalyst to drive oil prices higher. Moreover, hopes for a strong China reopening have given way to concerns about falling cargo shipments, building commodity inventories, and lackluster sales of homes and cars.”
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com

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