US Fixed Income Overview End of the beginning or beginning o...-110413813

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 LLCNorth America Fixed Income Strategy20 September 2024J P M O R G A N•Economics: The Fed delivered a 50bp cut at this week’s FOMC meeting, in line with our expectations, bringing the policy target to 4.75-5.00%. We expect the Fed to deliver a 50bp cut in November before beginning a series of 25bp cuts in December. We revise higher our 3Q GDP growth forecast to 2.5% and 4Q24 to 1.25%•Treasuries: The curve decoupled from medium-term policy expectations this week, despite a hawkish 50bp delivery to kick off the easing cycle. This could reflect increased confidence the Fed’s front-loaded cuts will extend the expansion. If this narrative per-sists, the curve can steepen bullishly or bearishly, but we will be patient before adding back to steepener exposure. Intermediate valuations appear modestly cheap, but yields are in the lower 40% of their recent range: stay neutral on duration for now. While the backdrop has turned more bullish for TIPS, valuations are not compelling. Stay neutral but hold energy-hedged 5s/10s breakeven curve steepeners.•Interest Rate Derivatives: Policy uncertainty remains elevated and we continue to pre-fer conditional trades which offer asymmetric reward in either bullish or bearish states of the world. To position for rising yields in the Reds, we like weighted Greens/15s flatteners. With low event risk on the horizon for the next two weeks, we turn bearish on shorter expiry and intermediate and longer tail volatility. We are more cautious on shorter tails, and recommend a neutral stance. While we remain broadly neutral on swap spreads for now, we now recommend positioning for a 2s/3s maturity matched swap spread curve flatteners•Short Duration: Despite the very front-end steepening this week, yield curves remain deeply inverted, challenging liquidity investors’ willingness to add duration. The yield spread between government and prime funds might narrow as we get further into the easing cycle•Securitized Products: Mortgage spreads had an excellent week, responding favorably to the 50bp cut. That’s put mortgages at new YTD OAS tights, but wide historical ZVs will continue to draw in buyers focused on nominal spreads•Corporates: The 50bp Fed cut, combined with light bond issuance and strong fund inflows, contributed a 7bp tightening in spreads. With spreads now just 7bp from recent tights, valuations are less compelling•Near-term catalysts: Aug Personal income (9/27), Aug JOLTS (10/1), Sep ADP (10/2), Sep employment (10/4), Sep CPI (10/10), Sep PPI (10/11)After weeks of anguishing anticipation, the Fed delivered a 50bp cut on Wednesday to bring the Fed funds target to 4.75 – 5.00%, in line with our expectations. During the ensuing press conference Chair Powell described the outsized move as a “recalibration” to preserve the currently strong labor market from downside ri