JPMorgan Econ FI-Interest Rate Derivatives The planets, if not the stars, are...-108474419.pdf

1SriniRamaswamyAC(1-415)315-8117srini.ramaswamy@jpmorgan.comJ.P.MorganSecuritiesLLCIpekOzil(1-212)834-2305ipek.ozil@jpmorgan.comJ.P.MorganSecuritiesLLCPhilipMichaelides(1-212)834-2096philip.michaelides@jpmchase.comJ.P.MorganSecuritiesLLCArjunParikh(1-212)834-4436arjun.parikh@jpmchase.comJ.P.MorganSecuritiesLLCNorthAmericaFixedIncomeStrategy31May2024JPMORGAN•Thedis-inversionoftheFronts/RedsandFronts/Greenscurveinrecentmonthshasbeenrelentless,butthismaybepoisedtobeginreversingcourse.Softereconomicdata,aswellasFed-speakthatleansagainstmorehikes,couldhelptoputbacksomemoreeasingintotheforwards•Thus,wesee1s/Greensflattenersasattractivewaystoinitiatebullishexposure,giventhiscurve’scorrelationwith5Yswapyieldsandgiventhepositivecarryincurveflatten-ersasopposedtonegativecarryonoutrightlongdurationpositions.Alternatively,forinvestorsseekingmarketneutralvariationsonthetheme,werecommend1s/Greensflattenerspairedwithaweightedshortin5sasanattractivecarrytrade•Althoughsomewhatlessobvious,1s/Greensflattenersarealsoattractiveincombina-tionwithlong1Yx10Yvolatilitypositions.ThankstotheprimacyofFedexpectationsindrivingtheyieldcurveandthankstopositivevol-ratebetas,thereisconsiderablecorrelationbetweenreturnsonfrontendcurveflattenersandreturnsondeltahedgedshortvolatilitypositions.Givenaflatteningbiasonthefrontendofthecurve,andimpliedsthatappearverycheaptofairvalue,wenowrecommendbuying1Yx10Yswaptionvolatilityonadeltahedgedbasispairedwith1s/Greenscurveflatteners•T-billnetissuancehasturnedpositiverecentlyafterseveralweeksinnegativeterritory,whichlikelyhelpedpressurefrontendspreadsnarrower.Butthisshouldbeshort-livedasCorporatetaxdayapproaches.Therefore,withspreadsinthe2Ysectorstillthemostnarrowrelativetofairvalue,wemaintainawideningbiason2Ysectorspreadsandrecommendpayingin4.625%Feb2026maturitymatchedswapspreads•Elsewhereonthetermstructure,7Yand20Yspreadsappearwidetofairvalue,but10Yand30Yspreadsappeartoonarrow-maintainasteepeningbiasonthe7s/10sand20s/30sswapspreadcurves•Onatacticalbasis,werecommendpayingin4.375%Aug2028maturitymatchedswapspreads,topositionforalikelyricheningoftheFVM4CTDaswemovebeyonddeliverydayandasthisissueexitsthebasketTheplanets,ifnotthestars,arealigningWhiletheworldislookingforwardtoseeingtheplanetslineupintheskynextweek,marketparticipantscontinuetowonderifthestarswillaligntoenabletheFedtobegineasinglaterthisyear.Whileweawaitsuchstellarstraight-talk,yieldshavedriftedmostlyhigheronthebackofweakerauctionsandmixeddata.Overthepasttwoweekssinceourlastpublication,PMIsandsentimentdatahavebeenstrongerthanexpectedandhousingdatahasbeenweak-er.Butontheauctionfront,allthreeauctionsthisweek(the2-,5-and7-yearnoteauctions)tailedandwereweakerthanexpected.Allinall,despitesomelate-weekdeclines,yieldsarenow5-10bphigheracrossthecurveledbythebelly.Amidstsuchamovehigherinyields,swapspreadsaremodestlynarroweracrossmuchofthecurve-ascanbeseeninFigure1,spreadsarenarrowerby1-2bpacrossmuchofthecurve.Themoveinrecentmonthshascausedmuchofthecutsthatwerepreviouslypricedintobesqueezedout