J.P.Morgan: 10-Year Supply Will Need Above Avg. End-User Demand

J.P.Morgan note that Wednesday will see the "Treasury auction $38bn reopened 10-year notes, unchanged in size from the last reopening in January. Since the last auction, 10-year yields have risen nearly 40bp, and remain near their highest levels since February 2020. However, yields appear somewhat high after adjusting for their fundamental drivers. Similar to outright valuations, the 10-year sector has cheapened along the curve and is trading at its cheapest levels on broad butterflies since late 2014. However, the sector actually appears fairly valued along the curve after adjusting for the level of rates and the shape of the curve. At a micro level, this issue appears rich relative to near-off-the-runs, as the 10-year note continues to trade near the -3% fail charge. We think the supply process should start to alleviate this richness and we remain short 10-year notes versus double-olds. Liquidity is less of an issue than it was around the disorderly auction process two weeks ago, market depth in the 10-year sector has recovered to levels more in line with averages seen over the past year. Turning to positions, our latest Treasury Client Survey shows net longs have risen to their highest since September, indicating investors have turned longer duration. Putting the pieces together, with outright and relative valuations near their cheapest levels in years and liquidity conditions largely normalized, we think tomorrow's auction should be somewhat easier to absorb, but it will require above average end-user demand to absorb smoothly."