Treasuries are telegraphing loud and clear their growth fears, and JPMorgan Chase & Co. is telling investors in stocks and credit to listen.
For a second time in as many months, the U.S. bank is advising clients to boost hedges against potential losses, citing a “persistent” and possibly unsustainable divergence between risk assets and bonds.
By its estimates, the decline of more than 100 basis points in five-year Treasury yields from the November peak points to a 53% probability of a U.S. recession over the next year. By contrast, the odds implied by stocks and high-yield bonds are much lower, at 17% and 1%, respectively.
Strategists including Nikolaos Panigirtzoglou and Marko Kolanovic recommend investors boost holdings in government bonds to match benchmarks, up from an underweight of 2 percentage points previously, while curbing exposure to most commodities.
The revisions extend the firm’s defensive posture that started in April. It proved prescient when global stocks shed $4 trillion the next month as Treasury prices surged.
“The persistent disconnect between equity and credit markets vs. rate markets creates the need to not only maintain but also augment our previous hedges,” the strategists wrote in a note to clients. “This is especially true as cyclical risks are still manifesting themselves in macro data in a similarly persistent manner.”
To beef up defenses, JPMorgan recommends adding a long position in the Japanese yen versus risky currencies such as those in emerging markets. Within commodities, the strategists introduce an overweight position in precious metals.
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