Short end CDX curves should flatten, says JP Morgan

In a report published last week, JP Morgan notes that the three-to-five year curve on the North American CDX index is at least 20 basis points too steep based on historical trading patterns. Short-end curves have generally steepened amid the recent rally, but the bank believes that the steepening in the investment grade index, at more than 40bp, is overdone.

One indication that the curve is now too steep is that a duration weighted curve flattener trade would produce positive carry and slide. Generally, duration-weighted flatteners should have a negative time value, writes credit strategist Eric Beinstein. Such a trade could be put on by selling $10 million of five year CDX protection and buying $16.2 million of three-year protection on the index.