HALISTER1: UST Valuations ‘Fair’; Add Longs in 5Y Swap Spreads: JPMorgan

UST Valuations ‘Fair’; Add Longs in 5Y Swap Spreads: JPMorgan

(Bloomberg) -- Valuations in Treasuries appear fair as domestic growth remains tepid, though low carry continues to flash warning signs, JPMorgan strategists including Matthew Jozoff write in a client note.
  • FOMC cyclicals suggest there’s room for yields to rise modestly over the near term; stay neutral U.S. duration
  • Long-end has steepened relative to the rest of curve, primarily driven by the decline in Fed tightening expectations
    • 25Y sector now looks cheap on the curve, recommend long belly of 20s25s30s fly
  • Strong demand at recent 5Y TIPS auction argues for wider breakevens over near term
    • Bullish on TIPS breakevens; look narrow to fair value, dealers positioning muted, carry due to turn substantially positive; maintain 5Y breakeven wideners
  • Recommend new longs in 5Y swap spreads; financial issuance is drying up, risk issuance-driven spread tightening is receding, macro environment supportive for more foreign demand for USTs
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Matthew Jozoff (Bear Stearns & Co Inc)

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