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J.P. Morgan Fixed Income Strategy Report: January 31, 2025

Market Outlook

• The Federal Reserve is expected to maintain its current policy rate and continue quantitative tightening (QT) until September 2025.
• Balance sheet forecasts will impact Treasury supply and bank deposits, leading to swap spread narrowing across most sectors, with particular emphasis on the 5-year sector.
• Term premium is likely to drive yield levels due to muted Fed activity, offering asymmetric exposure opportunities.

Key Recommendations

1. Swap Spread Trades:

   • Initiate 5-year maturity matched swap spread narrowing positions.
   • Execute relative value trades by selling old 10s against old 7s in specific sectors.
   • Use conditional belly cheapening swaption butterflies to position for term premium lifts.

2. Volatility and Gamma Strategies:

   • Employ short gamma strategies in stable Fed environments, leveraging mean reversion with less frequent delta hedging.
   • Sell 5Y ATMF swaption straddles and delta-hedge bi-weekly.

Trade-Specific Actions

• 5-Year Spread Narrowers: Sell FVH5 invoice spread narrowers.
• Relative Value Play: Sell old 10-year versus old 7-year notes in the Aug 2029 sector.
• Term Premium Exposure: Implement 3s/10s/20s weighted swaption butterflies.
• Volatility Hedge: Use biweekly-delta-hedged short straddles in 5Y swaps.

Disclaimer

This report reflects J.P. Morgan’s analysis as of January 31, 2025, subject to change. Past performance does not guarantee future results. Investments may fluctuate in value, and there are inherent risks. Please refer to the accompanying disclosures for further details.