1Srini Ramaswamy AC (1-415) 315-8117srini.ramaswamy@jpmorgan.comJ.P. Morgan Securities LLCIpek Ozil (1-212) 834-2305ipek.ozil@jpmorgan.comJ.P. Morgan Securities LLCPhilip Michaelides (1-212) 834-2096philip.michaelides@jpmchase.comJ.P. Morgan Securities LLCArjun Parikh (1-212) 834-4436arjun.parikh@jpmchase.comJ.P. Morgan Securities LLCNorth America Fixed Income Strategy23 February 2024J P M O R G A N•Fed-speak continues to signal patience and a desire to see more data supporting disinfla-tionary trends before beginning to ease policy, even as growth and inflation data remain strong. This is manifesting as rising policy uncertainty. A closer look at the Dec 2024 SOFR futures implied distribution suggests that modal outcomes remain centered around 5 cuts over the remainder of the year, but the relative weight on alternative sce-narios have risen. Currently, options markets are consistent with a sizeable weight on a 1-more-hike scenario in addition to the modal scenario of 5 cuts •Elevated policy uncertainty is supportive of high realized volatility. Small shifts in the relative weights of different policy paths can lead to significant moves in forward yields. Indeed, it is telling that YE24 forward OIS has traded in an 80bp range in recent months, even though the modal scenario has remained the same at 5 cuts. This helps to keep jump risk elevated, and is sufficient to cause us to maintain our bullish bias on gamma, espe-cially at the front end of the curve •At the same time, implieds on long tails appear rich - we recommend buying 2Yx2Y swaption volatility versus 2Yx30Y (0.5:1 vega weighted) and paying fixed in 10s to offset the modest bullish bias in this trade •The January FOMC minutes reveal little urgency with respect to tapering QT, and we revise our forecast accordingly. We now look for taper to be announced in June and begin the following month. In addition, negative Tbill issuance in 2Q24 should help make RRP balances stickier in the near term, and we reflect this in our updated forecast for the Fed�s balance sheet. We now look for QT to continue all year in 2024 •An extension of QT relative to prior expectations is a negative for swap spreads in the belly - we recommend unwinding widening exposure in the 5Y sector and turning neu-tral. At the long end of the curve, 30Y swap spreads appear fair but we recommend 20s/30s swap spread curve steepeners •Stickier RRP balances and falling T-bill issuance are headwinds to spread narrowers at the front end - we recommend unwinding 2Y swap spread narrowing exposure and turn-ing neutral •Our Treasury strategists� revised forecasts call for rangebound yield curves, which means that carry trades are attractive given the amount of easing and curve steepening priced into forwards. But policy uncertainty also makes the risk-reward in outright curve flatteners unattractive. We discuss t...
