- Cross Sector "The Fed’s decision to reinvest Agency paydowns into Treasuries is a shift toward a more accommodative monetary policy that defers its eventual exit strategy further. We now expect the Fed to stay on hold until 2Q12. The search for carry will likely stay the dominant theme. Look for further declines in intermediate yields. Stay overweight credit. Turn overweight MBS."
- Governments "The quest for carry continues, and is likely to progress further out the curve—look for the 2s/10s curve to flatten further in coming months, and continue to anchor belly-richening trades in the 10-year sector. Buy 3% Feb 17s versus TYZ, as Feb 17s are cheap and the Fed holds almost none. Buy 3.375% Nov 19s versus selling 2.625% Aug 20s and 4.75% Aug 17s. Overweight MBS versus Agency debt."
- Interest Rate Derivatives "We remain tactically neutral on spreads. Look for bull flattening to be increasingly concentrated outside the 5-year point of the curve; pay in 1Yx5Y versus a weighted barbell. Stay short volatility with a bias to longer expiries."
- MBS and CMBS "Move to an overweight on the mortgage basis, based on more attractive
fundamentals. Begin to add premium and IO exposure. Low nominal yields will motivate CMBS investors to reach for spread and duration in search of higher returns; look for AM prices to gravitate toward par."
- ABS and CDOs "Stay overweight subordinate Bankcard, Prime Auto Loan, and FFELP. Our top picks in AAA ABS are AMOT, WFNMT, and COMNI."
- Investment-Grade Corporates "An extremely strong technical backdrop and solid credit fundamentals will limit the magnitude of any spread widening. Thirty-year bonds are attractive vs. 10s."
- High Yield "The strong rotation of retail money into the high yield asset class remains intact; this week’s inflow was the fifth consecutive for a total of $4.9bn."
- Short-Term Fixed Income "Funding markets have improved so fast that LIBOR levels for the BBA panel banks are now lower than they were in March. However, funding pressures may re-emerge as over $150bn of EU bank debt still needs to be refinanced."
- Municipals "QE is supportive of further inflows into longer-term mutual funds at the expense of money funds. But, look for ratios versus Treasuries to move higher."
- Emerging Markets "Robust inflows to EM should continue to benefit assets, and we keep a year-end 250bp spread forecast."
- Special Topic: The JPM Agency Prepayment Model "Our agency involuntary prepayment models have been updated to take into account new efficiencies in GSE delinquent loan buyouts, a new primary/secondary spread mortgage model, and other factors. The model generates wider OAS and longer durations."
- Governments "The quest for carry continues, and is likely to progress further out the curve—look for the 2s/10s curve to flatten further in coming months, and continue to anchor belly-richening trades in the 10-year sector. Buy 3% Feb 17s versus TYZ, as Feb 17s are cheap and the Fed holds almost none. Buy 3.375% Nov 19s versus selling 2.625% Aug 20s and 4.75% Aug 17s. Overweight MBS versus Agency debt."
- Interest Rate Derivatives "We remain tactically neutral on spreads. Look for bull flattening to be increasingly concentrated outside the 5-year point of the curve; pay in 1Yx5Y versus a weighted barbell. Stay short volatility with a bias to longer expiries."
- MBS and CMBS "Move to an overweight on the mortgage basis, based on more attractive
fundamentals. Begin to add premium and IO exposure. Low nominal yields will motivate CMBS investors to reach for spread and duration in search of higher returns; look for AM prices to gravitate toward par."
- ABS and CDOs "Stay overweight subordinate Bankcard, Prime Auto Loan, and FFELP. Our top picks in AAA ABS are AMOT, WFNMT, and COMNI."
- Investment-Grade Corporates "An extremely strong technical backdrop and solid credit fundamentals will limit the magnitude of any spread widening. Thirty-year bonds are attractive vs. 10s."
- High Yield "The strong rotation of retail money into the high yield asset class remains intact; this week’s inflow was the fifth consecutive for a total of $4.9bn."
- Short-Term Fixed Income "Funding markets have improved so fast that LIBOR levels for the BBA panel banks are now lower than they were in March. However, funding pressures may re-emerge as over $150bn of EU bank debt still needs to be refinanced."
- Municipals "QE is supportive of further inflows into longer-term mutual funds at the expense of money funds. But, look for ratios versus Treasuries to move higher."
- Emerging Markets "Robust inflows to EM should continue to benefit assets, and we keep a year-end 250bp spread forecast."
- Special Topic: The JPM Agency Prepayment Model "Our agency involuntary prepayment models have been updated to take into account new efficiencies in GSE delinquent loan buyouts, a new primary/secondary spread mortgage model, and other factors. The model generates wider OAS and longer durations."
JPMorgan US Fixed Income Markets Weekly 20100813
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