Treasuries expected to rally in event of possible debt default - JPMorgan survey
Feverpitched
In the unlikely event of a U.S. technical debt default, both the longer-end 10-year Treasury yield (US10Y) and the more rate-sensitive 2-year yield (US2Y) are expected to fall by around 20 basis points each, according to respondents to a survey by JPMorgan published on Friday.
The U.S. debt ceiling has taken on added significance as talks between Republicans and Democrats have remained inconclusive. While an 11th hour resolution has always been reached, markets are more on edge this time.
All eyes will be on Tuesday's scheduled meeting between U.S. President Joe Biden and House Speaker Kevin McCarthy. The impasse stems from Republicans tying any increase in the debt limit to new agreements on spending cuts.
Treasury Secretary Janet Yellen has warned that if the debt limit is not raised, the government could run out of extraordinary measures to pay its bills as early as June 1.
As per JPMorgan's survey, 61% of respondents expect 2-year yields (US2Y) to fall by an average of 18 basis points, while 67% of respondents expect 10-year yields (US10Y) to fall by an average of 22 bp.
"Implicitly, this would leave the 2s/10s curve modestly flatter," JPMorgan said on Friday. The survey was conducted from May 9 to 11 and received responses from 123 institutional investors.
The survey results found no outright consensus on how front-end swap spreads would perform. 55% of respondents said they expect some widening, by an average of 2 bp.
Turning to the expected performance of the U.S. dollar in the event of an unlikely technical default, there was a strong consensus among the survey respondents that the greenback would depreciate relative to safe haven currencies.
"78% of respondents see the USD weakening by an average of 2.6% versus the JPY and the CHF," JPMorgan said. As of 1930 ET, USD/JPY (USD:JPY) +0.2%, USD/CHF (USD:CHF) -0.3%.
Respondents also believe the dollar will underperform relative to the euro, with 72% of respondents expecting the USD to weaken relative to the EUR by an average of 1.7%. As of 1930 ET, EUR/USD (EUR:USD) +0.2%.