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 Strategy23 February 2024J P M O R G A N•Treasury yields have risen further in the wake of a surprisingly firm inflation print and Fedspeak that has emphasized patience. We are hesitant to read too much into a single month of data and continue to think moderating inflation will allow the Fed to cut in June•The FOMC minutes revealed less urgency to begin tapering QT. We now expect a formal announcement in June, with a slower pace of runoff beginning in July. We think QT can continue through year-end when ON RRP balances reach approximately $300bn•Economics: We expect next week�s PCE report to show a firm 0.47% m/m increase in the core index. We will also get a variety of January GDP source reports that we expect to generally be weak•Treasuries: We raised our interest rate targets to reflect greater risk premium and a lon-ger QT runway. We hold longs in 5-year Treasuries: Fed pricing is too hawkish and positioning is very neutral. We raise our breakeven targets by 5-10bp across the curve and continue to hold longs in 5-year TIPS. We recommend old 10s/30s breakeven curve steepeners•Interest Rate Derivatives: Remain bullish on volatility on the back of heightened poli-cy uncertainty. Turn neutral on swap spreads across the curve. We discuss three ways to construct well hedged carry trades on the swap curve - 2s/3s flatteners and/or receiv-ing in the belly of a 2s/7s/20s swap butterfly paired with small longs in M4 SOFR futures, as well as 1s/5s conditional flatteners in a selloff. We detail our revised forecast for the Fed�s balance sheet•Securitized Products: Lower coupon Agency MBS came under pressure amid con-cerns over possible bank positioning rotation, and a somewhat more hawkish Fed pushed out the timeline for deposit growth. The recent surge in prepayment speeds has brought focus on Ginnie customs, which we review. Within customs, we prefer 100% FHA pool floaters•Corporates: High grade credit spreads are rangebound near post-GFC tights as heavy corporate issuance has been met with strong demand. In high yield and leveraged loans, the looming maturity wall has been significantly reduced, though we note remaining maturities skew towards lower quality credit. We revise down our YE24 HY spread forecast from 475bp to 450bp•Near-term catalysts: 4Q second real GDP (2/28), Jan personal income (2/29), Jan JOLTS (3/6), Feb employment (3/8), Feb CPI (3/12), Feb retail sales (3/14)Since our last publication two weeks ago, front-end Treasury yields have risen 20bp and the broad curve has bear flattened by roughly 20bp as near-term projections of Fed easing have ...
