‘Demand for Treasuries will prove short-lived’

Bloomberg

JPMorgan Chase & Co strategists are betting that the surge in demand for Treasuries thanks to fears about the deadly coronavirus will prove short-lived, sticking with a call to sell longer-dated bonds.
Among the Wall Street bank’s other takeaways from the latest market-outlook reports: the outbreak of the disease is a “clear negative” for emerging Asian currencies, while for stocks it could be a buying opportunity if historical parallels hold.
“This is the latest risk of a series that have driven US Treasury yields far below what fundamentals indicate,” strategists including Matthew Jozoff wrote in a note. “We don’t intend to be dismissive of the coronavirus, as it is a serious concern both in human and economic turns,” they wrote, while flagging that JPMorgan analysis notes a trend towards reduced mortality in health epidemics over time.
Geopolitical tensions stemming from Iran spurred a rally in Treasuries earlier this month, before the coronavirus emerged as a new threat to global economic growth. The bond bid extended on Monday, with 10-year US yields sliding as low as 1.62%, the lowest since October.
That latest leg down came after JPMorgan strategists had calculated that yields were almost 30 basis points “too low” compared with expectations for growth, inflation and Federal Reserve policy decisions, along with gauges of investor positioning and the share of negative-yielding debt in developed markets.
“Ten-year Treasuries have not been this dislocated on this basis since a brief period in the spring of 2015,” JPMorgan calculated. “We remain short 30-year US Treasuries.”
Turning to stocks, JPMorgan’s equity strategists flagged that the health-scare could lead to more near-term declines, while concluding that “past
pandemics episodes didn’t lead to sustained selling, they tended to ultimately be buying
opportunities.”
On the currency side, JPMorgan shifted its emerging Asia position to neutral, thanks to closing its overweight recommendation on Malaysia’s ringgit, which on Friday snapped a four-week winning streak.
“Such outbreaks can subside as quickly as they have emerged,” JPMorgan currency strategists led by Paul Meggyesi wrote. “However, previous episodes show that risk appetite can be disrupted for at least a number of weeks, particularly from an FX standpoint.”