JPM analysts Jay Barry and Jason...>

US TSYS/RESEARCH: JPM analysts Jay Barry and Jason Hunter said for now and 2018,

"there is significant room for the curve to flatten as distinct factors will

drive the front end and long end. At the front end, we expect the Fed to tighten

4 times in 2018, excess reserve balances to decline by $575bn, and most of the

$1.3tn in net Tsy issuance we project is likely to be focused in T-bills" and

2-yr to 5-yr notes. Such "factors should help drive yields in the 2- to 5-yr

sector well above the forwards," they said.

- They eyed long end factors: "weaker potential growth suggests" neutral FFR "is

significantly lower than levels in the last tightening cycle", so may "act as

somewhat of an anchor on long-term yield. That being said, we have been hesitant

to add flatteners, as the curve had run ahead of its fundamental drivers."

- But they said with "curve steepening sharply" in 1st half this wk, "valuations

no longer appear stretched: the 5s/30s curve traded as much as 11bp too flat at

the end of last week, and now appears fairly valued after adjusting for the

level of front-end yields, medium-term inflation expectations" and VA insurance

cos.' hedging needs.