A US recession is a virtual certainty and the Federal Reserve may lower interest rates by the third quarter as growth loses momentum, according to JPMorgan Asset Management.

“The market is right to be penciling in cuts,” said Seamus Mac Gorain, head of global rates in London. “Inflation is too high and it will take a recession to bring it back down,” he said, adding that US banking woes “have only made a recession more likely.”

Mac Gorain, who favors Treasuries, is siding with swaps traders who predict that the Fed will execute a policy pivot as soon as September to counter slowing growth. But the US central bank has repeatedly pushed back against this notion, raising the prospect that such bets may backfire if officials maintain a restrictive stance to subdue inflation.

Mac Gorain’s views differ from that of Goldman Sachs Group Inc. and Barclays Plc, which caution that the Fed will be less aggressive in cutting interest rates this year than markets are predicting.

JPMorgan favors Treasuries as the ultimate hedge against a slowdown, and sees potential for 10-year yields to slip below 2.5% in the event of a deep downturn. The 10-year US yield was trading at around 3.52% on Wednesday after climbing as high as 4.09% earlier this year.

“Treasuries is still the best market,” said Mac Gorain, adding that “other markets have started to become more attractive” as well including long-term forward rates in Europe. “The real point to get involved will be when you see clear evidence of inflation turning in those markets, which may not come until a bit later in the summer,” he said.

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Here are edited views from a Q&A with Mac Gorain:

Debt Ceiling

The most likely outcome is that it will be resolved after an episode of market stress. You’ll get that sort of market volatility just like you did in 2011 and that will be enough to push the political process ahead. It’s hard to say exactly when that will happen, whether it will be in the next few weeks or whether it might be a little bit later in the summer. We have shifted away from very short-dated US Treasury bills. We can get a higher yield for example, by owning Japanese bills instead of Treasury bills.

Japan Short

Has short cash Japanese bonds position. Because there’s possibility that Japan might get back toward 2% inflation, I think there really isn’t enough risk premium in the Japanese yield curve to reflect that. We think most likely the BOJ would shift from plus minus 50 basis points to 100 basis points on their yield-curve control at some point.

Bullish EM

We do think that local rates are strategically attractive. Generally speaking the nature of inflation there has been a bit different, it’s been more commodities driven. Real yields are pretty attractive in many of these economies, and EM central banks have dealt with these inflation episodes much better than DM central banks. One market we do like is Mexico.