Why JPMorgan Thinks You Should Just BTFD (Buy The Failed Dip)


Ok, so the debate continues about what exactly it is that YTD lows in 10Y yields portend not just for Treasurys, but also for risk assets and for the global economy more generally.

Needless to say, the recent bond rally doesn’t seem to say anything good about the future of the reflation narrative that drove yields, the dollar, and U.S. equities all higher in tandem after the U.S. election.

Earlier today, we brought you some bullet points from Bloomberg’s Wes Goodman who outlines the case for a continuation of the Treasury rally in the face of calls for a retrace higher in yields.

Well, JPMorgan is out on Monday with a BTFD-ish note that will make you happy if you’re long risk and looking to get long-er-er or especially if you’re short Treasurys and licking your wounds. More below…

Via JPMorgan

Last week we closed our tactical consolidation call that we had held since May. SXXP has fallen 7% during the summer, bond yields have moved back to the bottom of their ytd range, the yield curve has flattened and investor sentiment has turned bearish.

Admittedly, North Korea remains a wild card, but we now believe that one should use any weakness as a buying opportunity. In our view, a potential for a move up in bond yields, post the summer consolidation, should be one of the key catalysts for equities to advance into year-end.

Now, many argue that the recent fall in the US 10-year yield to 2% is a big warning sign, and that, as the bond market is “always right”, this move should be extrapolated. However, it was clearly wrong to extrapolate the rally in US yields towards 2.6% earlier in the year, and the same might hold in the current situation, too. We believe that one should be contrarian again and look for a bounce in bond yields into year-end.

A key positive development, we find, is the summer rebound in commodities. Copper is up 20%, oil is up 20% and iron ore is up 40% since Q2 lows. The JPM view is that commodity prices will remain firm in H2 as healthy global demand-supply balance and the weaker dollar provide support.

Higher commodity prices should, with a customary two- to three-month lag, lead to sequential stabilization in inflation prints. We note that inflation forwards have opened up a significant gap with commodity prices we expect this gap to start closing. In turn, the bottoming out in inflation metrics is one of the potential drivers of higher bond yields from the current depressed levels. The other support is the robust activity backdrop.

Finally, both the Fed and the ECB are expected to carry on with their plans to unwind / taper QE. Higher yields are supportive of Banks and Cyclicals trade.

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