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 Strategy09 February 2024J P M O R G A N•Yields drifted higher over the week, supported by hawkish Fedspeak and better-than-ex-pected data, while corporate spreads remained rangebound as well-received 4Q23 earn-ings were balanced with continued robust issuance•Despite concerns around later and slower Fed cuts in the face of resilient economic data, we maintain our forecast that the Fed is set to cut rates by the June meeting, as growth and inflation moderates into mid-year•Economics: We project headline CPI rose 0.1% m/m (2.9% oya) and core CPI increase 0.22% (3.7% oya) in January. We look for a 0.9% decline in January retail sales while the important control group remains flat•Treasuries: We recommend adding 5-year duration longs: yields are near the top of their 2-month ranges, with less Fed easing priced in, even as our fundamental outlook is broadly unchanged, and we expect softer-than-expected data in the week ahead. Remain neutral on breakevens, but position for lower 5-year real yields for better risk/reward•Interest Rate Derivatives: Remain bullish on volatility on the back of heightened poli-cy uncertainty and lingering tail risk. Carry trades remain attractive but we prefer to implement them conditionally in a selloff due to tail risks: underweight 2s vs. a weighted blend of 3s/5s. Initiate asymmetric exposure to a rally by buying Reds versus near-fronts and 10s•Securitized Products: Remain neutral on mortgages. Bank demand for Ginnies could become more focused on discounts, structured CMOs, or customs after a fast prepay-ment report. HPA came in ~5.7% in 2023, close to our expectations, and we project growth to remain flat in 2024•Corporates: HG bond spreads remained rangebound despite equity markets moving higher, an active pace of supply with February likely shaping to be another above aver-age issuance month and outperformance of Financials vs Non-Financials. We continue to see spreads heading higher in February•Near-term catalysts: Jan CPI (2/13), Jan retail sales (2/15), Jan FOMC minutes (2/21)Unlike many giddy fans this weekend, fixed income markets have already moved past their �Super Bowl� of monetary, fiscal, economic, and banking surprises last week. Indeed the data calendar was light while Treasury auctions and 4Q23 corporate earnings were well received, whereas Fedspeak skewed hawkish. As Figure 1Recent coments from Fed oficials highlighted patience around the timing of the first ease, which helped push yields higher illustrates several other FOMC participants expressed support for a “patient� stance, suggesting that the first ease will come either “a...
