1Phoebe White AC (1-212) 834-3092phoebe.a.white@jpmorgan.comJ.P. Morgan Securities LLCLiam L Wash (1-212) 834-5230liam.wash@jpmchase.comJ.P. Morgan Securities LLCHolly Cunningham (1-212) 834-5683holly.cunningham@jpmorgan.comJ.P. Morgan Securities LLCNorth America Fixed Income Strategy19 January 2024J P M O R G A N•Treasury yields continued higher and the curve steepened on the back of stronger-than-expected economic data and somewhat hawkish Fedspeak while HG credit spreads nar-rowed further to near their post-GFC tights as demand has outstripped supply. We think it is now appropriate to add duration in the belly while we turn bearish on credit spreads and remain neutral on mortgage spreads•We review monthly TIC data for November. Foreign investors bought $131bn long-term securities across US fixed income products, with foreign private investors adding $167bn while the foreign official sector sold $36bn. Purchases were concentrated in Treasuries and corporates and largely emenated from the Euro area and the UK•Economics: Retail sales rose 0.6% in December, with the control group rising 0.8%, providing an upside risk to our 2.0% real GDP growth forecast for 4Q223. Initial claims filings fell to their lowest levels in over a year•Treasuries: We recommend adding 5-year duration longs: yields are back to early December levels, TIPS breakevens look rich, and positioning appears neutral. Long-end pairs remain too flat to their drivers, though the mispricing is now smaller: hold 5s/30s steepeeners, as well as 2s/5s flatteners. TIPS breakevens have moved to their widest levels since early November and appear substantially rich versus fair value, likely driv-en in part by technical factors. Initiate energy-hedged 10-year breakeven narrowers•Interest Rate Derivatives: We maintain our widening bias on intermediate swap spreads and remain long gamma•Securitized Products: Mortgages spreads widened on the week but are now looking fair given the money manager, Fed, and bank demand profile. In mortgage credit, we prefer non-QM A2s over CRT M2s. Despite the optimistic tone at the CRECF confer-ence, we think the recent outperformance in CMBS spreads is likely overdone and turn cautious•Corporates: HG bond spreads are currently very close to post GFC tights, held down by continued very strong technicals. That said, we feel valuations are sufficiently expen-sive to justify a more bearish stance at this juncture•Near-term catalysts: 4Q advance real GDP (1/25), Dec personal income (1/26), FOMC meeting (1/30-1/31), Jan employment (2/2)Since our last publication a fortnight ago, long-end Treasury yields have continued to rise and mortgage spreads widen on the back of stronger-than-expected domestic economic data, pressure from DM rate moves, rising inflation expectations, and somewhat hawkish Fedspeak. Meanwhile HG exceptionalism extended into the new year with credit spreads ...
