JPM: Ltd Scope For Front End To Reprice Higher, Tactical Longs In 2s

J.P.Morgan note that the "trend toward an earlier expected Fed liftoff has been developing in recent weeks in reaction to signs of labor market strength and firming inflation data. On balance, even with the retracement, OIS forwards are pricing a full 25bp hike by the September '22 FOMC meeting and 45bp in total tightening by YE22, arguably much earlier than the Fed's own guidance from its latest SEP. Moreover, we've argued how the median dot may not necessarily reflect the most likely path for policy as the core of the FOMC notably leans more dovish than the median dot, which further distances the Fed from the market's expectation, and part of the reason why we do not project Fed liftoff until early '23. With QE tapering expectations firmly guided towards a mid-'22 conclusion of purchases, the September '22 hike that is now in the price, not to mention the additional hike priced in the end of next year are away ahead of what we see as the fair distribution of outcomes and more closely reflect an aggressive best case scenario in our minds."

• "There are now more hikes priced in through the end of '23 than in the following six years, meaning that the market has become more sanguine on the early stage of the hiking cycle ('22-'23) at the expense of less tightening post-'23. Even with inflationary pressures proving less transitory than previously expected, we think the core of the Fed will remain patient on the labor market recovery and therefore see limited scope for further repricing in the front-end of the curve. Certainly, if inflation remains persistently firm and labor markets tighten rapidly, markets could price in a more aggressive pace of tightening, but the steepness of the front end means a significant amount of slide offers some protection to longs at the front end. We therefore think that the 2-Year sector appears cheap and recommend adding tactical longs at current levels."
• They enter a long 2-Year position at a yield of 0.413%. One-month weighted carry is 2.9bp and roll is 2.4bp.