US Fixed Income Overview Sticking the landing-110617115

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 Strategy04 October 2024J P M O R G A N•Economics: The September employment report showed non-farm payrolls rose 254k last month, while the unemployment rate declined from 4.2% to 4.1%. We revise higher our Fed forecast, looking for a 25bp cut in November. Looking to next week, we expect core CPI rose 0.3% last month•Treasuries: Given our forecast of more modest easing through YE 24, we raise our YE24 2-year target to from 3.490% to 3.70% and our 10-year target from 3.55% to 3.90%. Reduced labor market risks limit the room for near-term steepening and the curve can even extend flatter if markets reprice terminal higher; unwind 3s/20s steepen-ers and remain neutral on duration. We unwind energy-hedged 5s/10s breakeven curve steepeners and initiate longs in 2Yx3Y inflation swaps•Interest Rate Derivatives: Strong data has led to shallower easing expectations, but policy uncertainty is again high. The recent rise in repo rates was related to quarter-end, but the rising magnitude of seasonal spikes are reminiscent of 2019, and will likely bring about an end to QT by year end. Rising geopolitical tensions warrant exposure to rising term funding premium and a flatter spread curve - initiate 3s/30s spread curve flatteners•Short Duration: We revised our SOFR and EFFR forecasts, with SOFR expected to be pressured higher above EFFR. This week’s spike in repo rates highlights SRF’s limited effectiveness in capping rates and redistributing reserves efficiently•Securitized Products: MBS investors are focused on the upcoming September prepay-ment data to see whether premiums will experience an environment more like 2019 or 2020/2021. We continue to the wings of the stack for better spread pickup. HPA growth Surging ABS issuance risks exceeding our $295bn forecast. In CMBS, we like fannie DUs 10/9.5 TBAs versus 10yr Freddie K A2s•Corporates: HG bond spreads at 99bp are at multidecade tights and are through our 110bp target, as stronger growth and higher yields are both supportive of tighter spreads. Tight spreads present the risk of widening by YE due to several potential catalysts including the Middle East conflict, the U.S. election, as well as ongoing weak growth in Europe and uncertainty around China’s recent economic stimulus. In HY we revise lower our YE24 spread target to 375bp and our YE24 default rate to 1.75%. In CLOs, We are reverting to our 130bp T1 AAA spread target for year-end, as late-summer deteri-oration in US hard data looks to be more of a temporary soft patch•Near-term catalysts: Sep CPI (10/10), Sep PPI (10/11), Sep retail sales (10/17), Oct flash manufacturing PMI (10/24), Oct flash services PMI (10/24)In an event-filled week, the biggest surprise for US fixed income markets was the hotter than expected September jobs report. Non-farm payrolls increased b