J.P.Morgan Turn Tactically Bearish On Duration Via Short 5s

J.P.Morgan note “though moderating underlying inflation does portend that we are in the late stages of the Fed tightening cycle which began only 10 months ago, we think the risk/reward is turning asymmetrically bearish in Treasuries, for a number of reasons.”

• “Yields have now declined 40bp YtD, retracing back to the lows observed around the December FOMC. Yields tend to decline 50-60bp on average once the Fed goes on hold, and with our final expected rate hike still over 2 months away, this rally seems somewhat premature.”
• “Labor market dynamics could indicate the need for the Fed to continue tightening at a 25bp clip for longer than is currently priced.”
• “While the probability of recession over the next year remains high, data indicate it’s not likely to be a near-term development.”
• “Global central banks come back into view next week, as the BoJ meets on January 18, the risks there seem skewed hawkishly.”
• “With inflation data is now behind us, OIS forwards priced to slightly more than 50bp in hikes in H123, and more than 50bp of easing in H223, it seems unlikely markets can price in a more dovish Fed path near term.”
• “Longer out the curve, it’s also evident that the latest rally has not been entirely fundamental in nature.”
• “Thus, we recommend setting tactical shorts in 5-Year Treasuries.”
• They recommendation came at an entry point of 3.545%.