The worst Treasury rout is over so far, says JP Morgan Assets

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(Bloomberg) —According to JP Morgan Asset Management, the worst selling hits on the world’s largest bond market may have ended so far.

This is the view of Seamus Mac Gorain, head of global interest rates for the $ 2.5 trillion investment giant, and the market is now aggressively raising US interest rates to combat the highest inflation in 40 years. He said he was putting a lot of money on expectations. He said most of the painful losses were already inked, even at yields an inch higher than this.

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London-based Mac Gorain said the Treasury still “can get some higher yields and could possibly reach 3.25%” for a 10-year benchmark that traded at about 2.9% on Thursday. Said. “But I think the truth is that there are already a lot of short-term moves going on at this point. There have already been pretty big fixes.”

Bondhead continues to maintain a “completely” short position in the Treasury, he added.

Mac Gorain’s proposal is welcomed by investors recovering from the worst drawdowns in US Treasuries since the Bloomberg Treasury Index was launched in 1973. Yields on 10-year government bonds rose by more than 200 basis points, reaching the peak of May 9 at 3.20%, while yields on interest-sensitive 2-year bonds rose by more than 250 basis points.

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JPMorgan Asset predicts that the worst defeats in history are likely to end with the addition of small but growing investors such as Morgan Stanley and Pacific Investment Management Company. So far, their bet seems to be in money. Nominal bond yields from the US to Australia have receded from their recent peak as market sentiment shifts from inflationary concerns to a recession.

For McGoline, a former bond portfolio manager at the Bank of England, he emphasized that the potential recession in the United States in 2022 would consider central banks to “act more aggressively” to curb inflation. Despite being, it is now close.

“Next year’s recession can be very serious,” he said, as the Federal Reserve is trying to balance the risks of inflation and recession. “You’ll see monetary tightening starting to impact growth. There’s less support from fiscal policy. We don’t see any major fiscal stimulus in the United States after the midterm elections.”

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Hiking Bonanza

Mac Goline isn’t the only one with the rising risk of the world’s largest economic downturn. Goldman Sachs Group Inc. estimates that there will be a 30% to 40% chance of a recession in the next 12 to 24 months. Elon Musk, CEO of Tesla Inc., said the United States is probably already in recession. This can last up to 18 months.

JPMorgan’s fund manager believes the Fed is implementing a “series of 50 basis point rate hikes” to curb price increases. This is in line with market expectations that the Fed is likely to raise borrowing costs by 0.5 percentage points at the next three meetings.

“There’s nothing impossible in these markets, but I don’t think raising 75 basis points is a likely option,” he said.

The edited comments from the Q & A are:

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Hiking into recession

Normally, the Fed has stopped its hiking cycle next year at a potential recession of 30% to 40%. I think this is a reasonable baseline of what can happen again.

European pressure

The risk of stagflation is certainly more realistic in Europe. I think a recession is “unavoidable” in Europe if there are even more serious restrictions on energy supplies, especially gas outages. At this point, the risk is higher than in the basic case. It is very likely that the ECB will be raised in July.

Yield management in Japan

After all, the yield curve control policy may change, but one of the things the Bank of Japan should do now is to shift the 10-year point target to 5-year points.

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