JPM Take Profit On Long 5s Recommendation

Late in the NY day J.P.Morgan noted that "intermediate Treasury yields declined 3-4bp, retracing to their lowest levels since just prior to the ill-fated 7-year auction last week. Looking ahead, the market continues to price Fed liftoff in early-2023, earlier than our modal forecast, but intermediate yields have declined nearly 20bp from their highs last week, and valuations are mean reverting somewhat, as real yields have declined more rapidly than nominal yields. Moreover, positioning has completely neutralized: our latest Treasury Client Survey shows net longs rose to 2%, the highest since September 2020, and somewhat above the average over the past year. Finally, we have noticed a consistent intra-month pattern has emerged since the economy began to recover last spring, with the bulk of the move to higher yields coming early in the month: 5-year yields have risen by 6bp on average in the 7 business days following month-end, and this has occurred in each of the last 9 months. We attribute this largely to duration flows: yields tend to decline into month end, where passively-managed indexed funds tend to add duration. However, yields rise as Treasury auctions its longer-duration securities in the early weeks of the new month: Treasury is slated to announce 3-, 10-, and 30-year auction sizes later this week for auction next week. Thus with yields considerably off their highs from last week, investor positioning turning somewhat long, and intra-month cyclicals suggesting risks of higher yields over the coming week, we recommend taking profits on tactical longs in 5-year Treasuries."