US Rates - Another Volatile Week in Rates Markets

[MUSIC] Welcome that anyway. JP Morgan's Global Research Podcast, where we take a look at the story behind some of the biggest trends and themes in the fixed income, currency and commodity markets today. I'm Ypiko Zil, head of US interest rate year with strategy, and I'm joined here today by Jay Barry, head of Global Race Strategy to discuss our latest thoughts on the rates markets following another volatile week. We are recording this on June 5th, 2026 and our comments today are based on our published research available on JP Morgan markets. Of course, today's payroll Friday, and the print was a big surprise to the upside with payrolls coming in at 172K versus an estimate of 88K. There was also a large upwards division to the prior print. That's not the only thing that happened this week. We started the week with more news on the Middle East conflict and we also had other strong economic data. All in all, another big week for rates markets, and more to come. With that, Jay, let's get started. Large moves today following payrolls, but even taking a step back, Fed expectations have been shifting, and the Fed rhetorical has been shifting as well. How are you thinking about the Fed and US rates on the back of this? Ypik, thanks so much for having me on the podcast today. You're right. It was a pretty strong employment report today. The headline number beating expectation, as you mentioned, there were revisions higher as well. The unemployment rate on a three decimal place actually moved lower and the labor income implications were quite positive as well. It makes sense to me that we have reprised Fed expectations further. In our baseline forecast, we have the Fed on hold until the third quarter of next year. At that point, we're expecting a hike. Money markets are clearly pricing at a more aggressive path than that, pricing a full hike by the end of this year by the December meeting, and pretty close to two hikes over the next one to two years or so. While markets have outpaced our own expectations, I can understand why. I think we've been making the case now for the past month since the April Fed meeting, that the Fed was ready to move to a neutral bias at the upcoming meeting in about 10 days. While I think that has probably been priced, given how we have reprised Fed policy expectations over the course of the last five or six weeks, we've made the case that in a world in which term premiums in the US and globally have risen. If you've got a central bank with a neutral bias, that can contribute to having an upward slope to the money market curve, even out for the next one to two years. So the fact that you've had labor market data outpacing expectations and pricing in more and earlier hikes makes sense to me. I think back to our own economics team, they have been talking for some time that this conscious un coupling between capital expenditures and labor markets would ultimately resolve itself through stronger job growth. And we're seeing that right now. So if the labor market appears relatively stable, and right now the unemployment rate has basically been stable for the past year, the pace of employment growth has picked up. And inflation is well over the Fed's target. It makes sense to me that we're pricing in a hiking path. And if I look forward, even with these moves, Treasury yields are trading a little bit too low in our valuation framework. So I think in aggregate, this is a justification of the moves that have occurred. The Fed is moving to a neutral bias. The Fed speak this week has been hawkish. Valuation just look rich. So I think there is a risk that rates can continue to move higher from current levels from here. And that we wouldn't stand in the way of it to be quite honest. Thanks, Jay. That's very helpful. But is there anything else technical that we should be focused on? You've talked about the fundamentals and the macro backdrop. And I guess related to that, what does this mean for your rate forecast? No, I think that's a great question. I think two things to highlight there. First, you did mention it on the technical side. Our own Treasury client survey extended a little bit this week, but it's very close to where it's been over the past four weeks. And really not out of line with where it's been for the past year. But I think we've observed that the way we track the positioning of the asset manager community that they are is overweight duration as they have been. The Fed was easing last fall. And if anything, that's come with a more neutral curve bias rather than the steepening bias. So it seems like much of the buying occurred longer out the curve. So I'd say positioning is a little bit long here. And that could be a risk to higher rates. The other thing I'd say is that by and large, with these moves that we've had, Treasury's not only appear rich relative to their fundamental drivers in our frameworks. But they also appear quite rich from a cross market perspective. So when we put the pieces of the puddle together, the risk that markets can price more in earlier Fed hikes in a world in which term premium is positive. A world in which positioning is a little bit long. A world in which treasuries look rich in our valuation framework and on a cross market basis. And we've just really decided that we're going to adjust our yield targets higher to reflect this new reality. So previously, we had forecast that 10-year yields would likely rise to about 4.5% by the end of this year. They're clearly above that level right now. Now we're forecasting that 10-year yields will rise to 4.70 by the end of the year. So again, while markets are pricing in an earlier and sooner set of hikes than in our forecast, even if we just see some mean reversion here and yields retrace back to where they should be considering how we're pricing Fed policy over the next few years, inflation and growth. And if we sort of retrace back to the mean relative to where we're trading to European government bonds, Aussie government bonds, Canadian government bonds, and even GILTS, that in itself lends itself to a biased higher yield. And that's why we've made those adjustments from right here. That makes a lot of sense. And just to pivot back to something you were talking about, you were talking about cross market opportunities. Are you seeing any? Yeah, no, absolutely. And I think just to dig in a little bit more with what I just briefly said, I get stands out to us that treasuries appear relative to their developed market peers. And I think to us, you can see it most aggressively in the boom treasuries spread. So in our own frameworks, once again, looking at the boom treasuries spread as a function of how we're pricing relative policy differentials over the course of the next one to two years. And looking at relative changes in growth forecasts from our forecast revision indices, it appears to us that that spread is trading about eight to 10 basis points too low. So I think there is a real risk here that not only can US yields move higher, but that they should underperform rest of the world in this move as well, which is a little bit unusual because the story over the course of the last three months or so as oil prices have moved higher is rest of world leading US. But now this is becoming a decidedly domestic story as well, given that the labor market data has improved and given that inflation does remain above trend with growth still holding in. So I think there's a definitive verse from a cross market perspective that we see yields move higher in the US while they don't actually move higher in rest of world. And I think we talked to our colleagues in European rate strategy in London. They've been making the case that boom yields should be probably in a 290 to 310 range. And we're kind of getting close to the upper end of that range right now. And it would support that view as well. So I think those are the important ones. But maybe EPEC, if I can just sort of turn it back to you, this has obviously been a highly volatile week, not just in the US, but globally. And we've seen this decisive flattening of the curve. So what's going on in the risk markets right now and what's going on in the oil markets over the course of the week? Yeah, so as you said, it's been a highly volatile week and the implytes have increased over the week, basically on the back of one geopolitical backdrop and also higher yields today. And looking ahead, there are still a few potentially high volatile days in the next couple of weeks. So that means imply diets could remain elevated. And it's kind of worth, it's an interesting exercise, but it's kind of worth digging into you know, how much markets are pricing in for the FMC meeting, which up until I would say maybe in the last year or so, it has not been a high volatile event. But if we look at what sort of, if we try to infer what the markets are pricing in for the FMC, we end up seeing roughly 10 to 11 basis points of volatility for that day, which is pretty large. Given that implies that currently between college five to six basis points for day. So all of that to say, there could be even more volatile in the next couple of weeks if the geopolitical backdrop doesn't change. And you know, we have two high event risk days coming up like CPI and FMC. Thanks so much, EPEC. So thinking about that kind of high-vol events, if we kind of take a step about this week, though yields moved a lot and obviously it's a function of the Fed rhetoric and the non-farm employment report as we talked about. But swap spreads have been very well anchored. And you look at it over the week, they haven't really moved much at all. But if I sort of like hold back the perspective and take a multi-year perspective on this, it's really notable that swap spreads particularly at the front end of the curve are now back at multi-year wide. So really they're wide in over a year when when twos are trading here at Zofar plus 14 basis points. So what's going on in swap spreads right now? And what should we be thinking about with respect to spreads going forward? Yeah. I mean, it's been a second since spreads were not the main story. They've been quite volatile in the past. I would say actually even a year, but it's been in the past three weeks. I mean, three months. But yeah, so front end had always appeared to be well anchored. The volatility in the front end was always much lower compared to the long end. But it's been a case of slow and steady. So two-year spreads have been slowly drifting up. And like you said, they now set out so-for-plus-14 basis points. So this good result and in a shift where investors look for carrier opportunities. As we've talked about this in this podcast before, when was low, investors can turn to swap spreads for carry. And two-year spreads used to look attractive on a risk-adjusted basis. But now, for the first time in six months, three-year spreads look as attractive as two-year spreads that on a risk-adjusted basis. So for investors who are looking for carrier opportunities, there could be a shift from the very, very front end to slightly further out the curve to three years and then potentially to the five-year sector. Looking ahead, yes, there is the risk geopolitical backdrop. But no, there could also be more tailwinds for spreads as we get into a period of negative billions, but you know, it's again, at the risk of repeating myself, it is a little hard to take an out-track view on spreads given the high-wall backdrop. Jay, so is there anything else that you wanted to add that we have not covered in our podcast? I think the only other thing I'd say, you back right now, is that with the employment data out of the way, we do have inflation data to consider next week. But I think the overwhelming story has got to come from the notion that once again, as we circle back to our opening comments, that it seems like there's been this labor market re-coupling and firming. So that means that the focus is going to squarely turn to the June Fed meeting, which again is still more than more than 10 days away. But I think it's particularly important to kind of consider it, because this will be Warsha's first appearance as the new Fed chair. And while again, markets seem pretty not complacent, but I think embracing the notion that the Fed will move to a neutral bias, I think there's a lot more to unpack here with respect to the Fed meeting. And just thinking about the evolution of the dots for 2026 and 2027, because those dots are still projecting on a median basis a cut in 2026 and a cut in 2027 as well. And thinking about how the press conference goes as well. So certainly with this pivot more hawkish from Fed and the understanding that the bulk of the committee has moved a long way from where we were even in April, I think that's going to be the next sort of set of things we'll be considering over the course of the next week or so. But outside of that, I think we've really covered it here, EPEC. And thanks for having me on the podcast today. And I think we should probably just wrap it up. So thanks for listening and stay tuned for more episodes of At Any Rate, which is JP Morgan's Global Research Podcast series. This communication is provided for information purposes only. Please read JP Morgan Research reports related to its contents for more information, including important disclosures. Copyright 2026, JP Morgan Chase and Company, all rights reserved. This episode is recorded on June 5, 2026.