JPMorgan Bets on Steepening U.S. Treasury Curve, Favors High-Yield Currencies While Warning of Oil Supply-Demand Divergence
nashnova research
JPMorgan maintains its 10Y-30Y Treasury curve steepener trade, favors carry in G10 high-yielders, but warns that oil consumption is shrinking at recession-like speeds even as the global economy still grows — a supply-demand divergence worth watching.
The curve steepener — why bet on a wider long-short spread now?
JPMorgan argues that Fed Chair Wosh's post-decision remarks support modest downward drift in front-end yields, giving the steepener a policy tailwind.
The bank judges the curve is still slightly too flat relative to the market's medium-term Fed expectations; absent a major shift in Treasury debt-management strategy, it should keep steepening.
This means → the trade is not a pure directional rate bet. Its profile resembles a low-beta duration long — if risk assets weaken further, the steepener should benefit.
In plain terms = it earns spread when the economy holds up, and acts as a cushion when markets turn — offense and defense in one position.
The November refunding announcement — could Treasury upset the trade?
JPMorgan expects forward guidance, nominal coupon auction sizes, and buyback volumes to stay unchanged in the November refunding statement.
The bank sees no good reason to cut long-bond auction sizes, but acknowledges the risk tilts toward Treasury doing exactly that.
This means → a surprise cut in long-end supply would compress long-end yields and squeeze the steepener's runway — this is the strategy's key tail risk right now.
FX — what supports the dollar? How does the carry trade work?
JPMorgan notes the U.S. midterm election could push the dollar either way: a Democratic sweep would be mildly bearish; a Republican Senate hold would be mildly bullish — but policy impact is limited under either scenario.
The real dollar anchor is U.S. equity outperformance, not the election itself.
On carry, the bank still favors G10 high-yielders — AUD, NOK, and USD — and prefers EUR as the funding currency over CHF or JPY (i.e., borrow cheap euros, buy higher-yielding currencies to pocket the spread).
This means → as long as there is no sharp volatility shock or growth disappointment, the wide yield gaps across currencies should keep the carry trade viable over the medium term.
Emerging markets — why is JPMorgan trimming exposure?
JPMorgan strategists have turned more cautious on EM and are scaling back portfolio size.
The focus is narrowing to the highest-carry currencies and trades with the strongest idiosyncratic drivers, while the long end of EM yield curves is treated with care.
This reflects the bank's view that fiscal concerns and supply-demand dynamics are not yet fully priced — neither curve steepening nor asset-swap spreads have caught up with the underlying risks.
Oil supply-demand divergence — the economy is growing, so why is oil consumption shrinking?
JPMorgan warns that most of the global economy is still growing, yet oil consumption is contracting — in some regions at a pace normally seen only during recessions.
In plain terms = GDP data says "still fine," oil demand says "not fine" — the two signals are contradicting each other, and the divergence itself is a risk flag.
In the Middle East, since U.S. and Israeli military action against Iran effectively closed the Strait of Hormuz, oil exporters have maintained shipments via rerouted pipelines, alternative sea lanes, AIS-off sailings, and ship-to-ship transfers.
This means → supply is being held together by workarounds; if any single link breaks, oil prices could move violently.
Copper and agriculture — what other downside risks are in play?
On copper, JPMorgan has turned cautious: the U.S. has delayed tariff action, and the dislocation premium baked into copper prices (from pre-emptive stockpiling) may now fade.
In South America, El Niño–related rainfall anomalies continue to intensify, keeping weather as a key variable for agricultural markets.
After the midterms, market attention shifts to the USDA's November 10 World Agricultural Supply and Demand Estimates report — the next major recalibration of global crop supply-demand expectations.
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