J.P.Morgan Believe 2-Year Supply Will Be Easily Digested

Ahead of Tuesday’s 2-Year Tsy auction J.P.Morgan note that “2-Year yields are 13bp lower since the December auction and OIS forwards imply a terminal Fed funds effective rate just below 5%, in line with our expectations for two consecutive 25bp hikes at the next FOMC meetings.”

• “The WI roll opened at -5.5bp, in line with our estimate, and has narrowed 0.75bp since, well in excess of the erosion of carry over the WI period.”
• “Supported by a backdrop of softening data, market expectations of future Fed hiking has remained rather fixed, despite a pushback by Fedspeak, and the associated increased duration demand alongside weak liquidity has led to exceedingly robust auction processes YtD.”
• “While we believe the recent bullish sentiment has run ahead of fundamentals and remain tactically bearish on duration, we think this supply should be easily digested: duration demand remains strong as market consensus builds that we are reaching the end of the tightening cycle.”