J.P.Morgan Await Better Entry Points For Higher Yield & Steepener Plays

J.P.Morgan note that "despite the intense scrutiny around this week's long-duration auctions, the auction results were unremarkable: the tail at today's auction was in line with averages observed over the last 5 years, while the share of end-user demand remains above longer-term average levels"…"More broadly, this week's auctions show that the reports of the death of end-user demand at Treasury auctions have been quite exaggerated. Instead, we think the more variable auction results comes down to the role of dealers. Though the share of dealer demand hasn't appreciably changed over the past year, the amount of duration dealers are underwriting each month has doubled over the past year, given the large increases in monthly coupon-bearing auction sizes. Moreover, risk-taking capacity has not grown commensurately with the growth of the Treasury market: dealer positions represent just 1% of total outstanding Treasuries, significantly below its pre-crisis peak. Looking ahead, with the most concentrated amount of monthly duration supply now absorbed with relative ease, this should leave room for yields to stabilize over the coming days, as the bulk of the move to higher yields tends to occur over the first 5-10 trading days of the month. Over the medium term, we continue to think rising growth and inflation expectations, alongside a patient Fed, will lead to higher yields and a steeper curve over the coming months, but we look for lower yields and a flatter curve to add back to these positions."