Safe-haven demand lifts Treasuries as credit risks diverge: Why does JPMorgan still expect yields to rise slightly?
Pressure on European sovereign bonds and concerns over AI valuations are driving safe-haven demand for US Treasuries, but JPMorgan believes the 10-year yield is already about 15 basis points below its model-implied fair value. Credit market pressure is concentrated in major cloud providers and lower-rated bonds, while ABS and agency CMBS are relatively resilient.
Original source：J.P. MorganFirst published on Unhidea：Original source date：
Key takeaway
JPMorgan attributes the Treasury rally mainly to safe-haven demand and favors curve trades to position for higher yields, while distinguishing localized risks from relatively resilient assets in credit markets.
Why are Treasuries attracting demand even as energy prices rise?
Pressure on European sovereign bonds is driving funds into Treasuries: the French-German sovereign bond spread widened by 35 basis points this week, reaching a level seen only briefly during the European debt crisis in autumn 2011. JPMorgan believes deteriorating European market functioning has increased safe-haven demand for Treasuries, whose liquidity remains better than the average over the past three years.
Concerns about AI equity valuations are also affecting rates. Over the past month, the correlation between Treasury yields and Nasdaq performance has strengthened, while yields have been negatively correlated with Brent crude prices. JPMorgan believes equities could still dominate short-term rate pricing even if the economy remains resilient.
Why still expect yields to rise if safe-haven demand has strengthened?
Under JPMorgan’s valuation framework, the 10-year Treasury yield is already about 15 basis points below fair value, so the bank sees a tendency for yields to rise slightly in the short term. It continues to hold a position for a wider spread between 10-year and 30-year maturities, reducing dependence on the overall direction of rates.
The key to the Federal Reserve’s 28 October meeting lies in its explanation of policy. JPMorgan and market consensus both expect no change, with the market pricing in only about a 10% probability of a hike; the bank expects two members to cast hawkish dissenting votes. If the chair avoids explaining why rates were raised when core PCE rose 0.2% month on month in August but paused in the face of an expected 0.3% increase in September, the market may interpret that as dovish.
Are wider credit spreads a sign of localized pressure or broad deterioration?
Pressure in investment-grade corporate debt is more concentrated among major cloud providers: the spread on JPMorgan’s relevant index widened by 10 basis points to 158 basis points, while investment-grade spreads excluding those issuers widened by only 4 basis points. The bank therefore sees limited spillover to other companies and maintains a positive view for now.
The lower-rated market is distinctly weaker. High-yield bond spreads have returned to their high for the year reached in March; CCC-rated spreads widened by 117 basis points in October, far more than the 26 basis points for BB and 38 basis points for B. The leveraged loan index fell for a fourth consecutive week, and spreads rose to an 18-month high, with lower ratings facing greater pressure.
Which securitized assets are better able to withstand this volatility?
JPMorgan expects stable consumer credit fundamentals to keep asset-backed securities (ABS) relatively resilient amid macroeconomic volatility, with spreads trading mainly within a range for the rest of the year. Its view rests on stable delinquency roll rates reported by issuers and lenders and healthy investment demand; however, spreads remain tight, and the assessment assumes no major news triggers a broad credit market sell-off.
Agency commercial mortgage-backed securities (Agency CMBS) also compare favorably: their index’s excess return for the year is 86 basis points higher than that of the residential mortgage-backed securities index. However, data-center single-asset CMBS remain weighed down by AI concerns, and the resilience of agency assets does not extend across the entire CMBS market.
Could month-end funding become a new source of pressure?
Treasury bill settlement, the Treasury’s cash balance briefly approaching 1.1 trillion dollars, and Canadian dealers reducing balance-sheet capacity at fiscal year-end could all make funding marginally tighter next week.
JPMorgan expects limited pressure: SOFR may be only 1–2 basis points above the interest rate on reserve balances. Money market fund assets increased and investment maturities shortened this month, providing a buffer for funding markets; average SOFR is still expected to remain close to the interest rate on reserve balances over the coming months.
