US Treasury yields hold long-term value, JPMorgan launches ‘low-beta steepener’ trade

According to Zhitong Finance APP, in the context of global asset pricing anchors (US Treasury yields) resonating with geopolitical and weather variables, JP Morgan's latest Global Macro Outlook and Strategy sketches a market landscape of "structural divergence and opportunity convergence." US Treasury yields have retreated, driven by equity market risk aversion and expectations of changes in debt management, while European bonds have stabilized after a sharp sell-off. The US dollar remains strong, supported by the "American exceptionalism" narrative, and El Niño is quietly rewriting the pricing logic of European winter and agricultural commodities markets. Overall, JP Morgan maintains a "cautiously optimistic" stance—yields remain high, providing long-term value, but short-term uncertainties are elevated. Thus, opportunities are more concentrated in selected structural positions rather than broad directional bets.

US Treasuries: Low Beta Steepening Trades Emerge, Supply and Structure Constrain the Long End

JP Morgan believes that the current decline in US Treasury yields is driven both by concerns over stock market risk and rising expectations for a shift in Treasury debt management strategies. On the policy front, the Federal Reserve is expected to raise rates by another 25 basis points in December. After a rebound, short-term valuations are no longer significantly undervalued, and the 10s/30s curve remains notably flat. Therefore, initiating "long 10s/30s steepening" trades serves as a low beta tool to indirectly express duration longs—if the Treasury does not signal a reduction in long-end issuance in the next month’s refinancing, this position could benefit.

It is important to note changes in investor composition. Official overseas demand for US Treasuries has fallen to its lowest since 2021, commercial banks’ motivation to buy has weakened, and long-end investors are shifting toward groups more sensitive to price, keeping long-end yields relatively high. JP Morgan, citing experience from the UK and Japan, reminds us that adjusting long-end issuance or buybacks tends to provide only short-lived, pulse-like effects on the market, and one should not have overly high expectations for supply-side policy support.

Europe, UK, and Asia-Pacific: Tactical Caution Amid Stabilization and Strategic Value

After a major sell-off in September, Eurozone bonds have stabilized over the past two weeks, with the yield curve flattening by 5–6 basis points and underperforming the US bond bull flattening driven by AI sentiment. Given continued uncertainties from Middle East conflicts and the potential correction in AI stocks, JP Morgan maintains tactical caution on unilateral duration exposure in Europe but emphasizes that yields remain high and attractive to long-term investors, continuing to favor bunds relative to US Treasuries. Within the Eurozone, caution is advised toward Italy, France, and Spain sovereign spreads, favoring relative value structural trades.

In the UK, the view on duration is tactically neutral, with long-term optimism for yield allocation; the fiscal budget is not expected to significantly increase term premiums. In Japan, the 2s10s JGB steepening trade is maintained, although confidence has weakened; the ultra-long end is disturbed by life insurers’ portfolio shifts and reduced BoJ purchases. Unless severe broad-based risk aversion occurs, the market may first reprice the short end for rate hikes, followed by a decline in long-end yields.

FX and Commodities: Dollar Strength as a Mirror to the "Internet Bubble," El Niño Redefines Winter

In foreign exchange, the "American exceptionalism" narrative continues to support the US dollar, and JP Morgan recommends using options to go long the dollar. They draw a historical parallel with the late-1990s internet bubble: currently, foreign capital is pouring into US equities, with inflows proportionally close to the bubble period. However, the US now faces twin deficits, unlike the fiscal surpluses of that era. If the AI narrative ends, the dollar might see double-digit depreciation, though this turning point is not imminent in the base case.

For commodities, the core variable is El Niño: expectations for a mild winter may suppress European heating and electricity demand, pressuring natural gas prices lower; the agricultural shock is expected to peak in Q1 2027. There is notable divergence among base metals, with copper supported by year-end Chinese import demand and supply risks, while aluminum faces the pressure of supply surplus anticipated in 2027.

Emerging Markets: Portfolio Compression, Focusing on High Carry and Unique Fundamentals

The external transmission of energy prices and high US Treasury yields is starting to generate fiscal, volatility, and growth pressures in emerging markets. JP Morgan maintains a baseline overweight in emerging market FX, believing that the overall inflationary environment has not yet undermined the logic of carry returns, but stresses the need to shrink portfolios—retaining only the highest carry assets with unique positive fundamentals, reducing CEE exposure, and increasing Latin America allocation. Terminal rate repricing potential is limited, but the long end still faces steepening and fiscal risks, warranting caution.

Overall, JP Morgan presents a "conditionally optimistic" roadmap: high yields offer long-term allocation value, but the short term is constrained by multiple variables including geopolitics, AI stock corrections, fiscal supply, and weather. Middle East tensions, US midterm elections, US Treasury refinancing, El Niño’s strength, and the spillover of elevated US yields are all critical variables to monitor. The current market is better suited to capturing opportunities through curve structure, relative value, and selective emerging market exposures, rather than betting on a single direction.