J.P.Morgan Believe 3-Year Supply Likely Requires Further Concession

Ahead of Tuesday’s 3-Year auction J.P.Morgan note that “3-Year yields have risen 33bp since the October auction after last week’s commentary from Chair Powell suggested the terminal rate will be above the level implied by the September SEP dots. Indeed, OIS forwards are now implying a terminal rate above 5% and less subsequent easing in 2023 than was previously priced in.”

• “The WI roll opened at 0.25bp, in line with our estimate, and has widened to roughly 0.375bp, underperforming the erosion of carry.”
• “While we have been arguing that the front end should offer value at such high yields, we are also cognizant that the risk of a higher terminal rate could keep demand in check, particularly with volatility remaining elevated.”
• “Additionally, the 3-Year note appears fairly valued relative to the wings after adjusting for rate levels and curve slope.”
• “With valuations looking fair on the curve and risk appetite low ahead of the October CPI release this Thursday, we think tomorrow’s auction is likely to require a further concession from current levels.”