JPM’s Oksana Aronov says, “The 10-year is still… very much priced for a 2% inflation world.”  Jay Powell wants to “demolish” the unhealthy relationship between asset prices and Fed policy, so don’t wait for the Fed punch bowl to come back.  Also, the default cycle is underway.

Unless we see the economy in complete freefall, the Fed will hold.  The Fed has only raised 25 basis points since May, but the long end of the curve has reacted substantially.  30% of outstanding Treasuries are maturing in a year and a half.  The Fed is selling $1T.  China has been selling about $300B/year since 2021, and banks aren’t a net consumer of Treasuries.  Juxtapose this with $1.5T of deficit spending this year.

Also, Ms. Aronov thinks that inflation pressures will stay because of demographics and green energy initiatives.  Growth, inflation and a long-term premium all point to a higher 10-year.  “The next 10 years are going to be nothing like the last…  Preserve optionality in the form of liquidity.”  She believes that corporate credit spreads are “wildly optimistic.”