EFTA00759809.pdf

From: GIO Group JP Morgan 1'o: Undisclosed recipients:; S u icct: GIO Closing Trade Idea: 2-10 Curve Flattener and 10Y Swap Spread Wideners Date: Fri, 07 May 2010 22:08:18 +0000 Attachments: GIO_Trade_Update_2010-05-07_Closing_Trades_.pdf Inline-Images: image002.png; image004.png; image009.png Global Investment Opportunities Group (GIO) Opportunistic Investments J.P.Morgan May 7, 2010 CLOSING TRADE IDEA: 2-10 CURVE FLATTENER We believe clients in the 2-10 curve flattener trade should take advantage of current levels to exit the trade. Since we first wrote about it in January this year, the curve has flattened 25-30 bp. Our original thesis was for the curve to flatten either due to markets pricing in Fed rate increases or another pullback in risk driving yields lower, which is what we've seen over the past few days. While we still believe the curve will flatten sharply once the Fed tightening cycle begins, the low for long" language could remain in place for longer than previously expected; there has been little in the way of inflation pressures and unemployment, while stabilized, remains high. We will continue to watch levels and the Fed carefully for a re-entry point but believe investors should use the recent rally in the long end to take profits and re-enter the trade later this year. Source: Morgan Securities, Inc.. Bloomberg. Data as of 05/07110. EFTA00759809 CLOSING TRADE IDEA: 10Y SWAP SPREAD WIDENERS We recently highlighted an opportunity in 10 year rates to take advantage of what we believed would be a relatively quick correction in swap spreads. With 10 year swap spreads now back in positive territory, we believe clients who put on widener positions when spreads were negative should take this opportunity to take profits. According to JPMSI, at -5 bp, 10 year swap spreads were about 20 bp below fair value. However, if the negative 30 year swap spread levels since late 2008/early 2009 are any indication, 10 year swap spreads could also remain low for an extended period of time, particularly as there remain sources of pressure (rising sovereign risk concerns, large US debt burden, short mortgage positions, etc) that are likely to persist. While we will be closely monitoring levels for other entry points, we believe clients should remain opportunistic and take advantage of recent market movements to take profits. 10Y Swap Rate- 10Y US Thrasur; Yield bp 160 140 120 100 80 60 40 20 0 -20 0 co C 4'C 9 C 9 C 9 C 14-0 C 4 C C rto N C C Source: I. Morgan Securities. Inc.. Bloomberg. Data as of 5/7/10. IMPORTANT INFORMATION This presentation and the material contained herein is not a product of the S Morgan Research Department and is not a research riigort. although it may refer to a research report or research analyst. This presentation should be reviewed in conjunction with U.S. research published by M. Morgan Securities. Inc. to the extent that such research exists. The opinions and ideas expressed herein do not take into account individual client circumstances, objectives and needs. Transactions in any securities that may be referenced herein may not be suitable for all investors. Thitgresentation has been prepared for information purposes only. Nothing in this material is intended to be a solicitation for any product or service offered by Morgan's Private Bank or any of its affikates. Information contained herein has been obtained from sources believed to be reliable but we do not guarantee its accuracy or completeness and accept no responsibility for any direct or consequential losses arising from its use. The views and strategies described herein may not be suitable for all investors. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument and is being provided merely to Illustrate a particular investment strategy. Past performance is no guarantee of future results. Investment Products: Not FDIC Insured - No Bank Guarantee - May Lose Value EFTA00759810