J.P.Morgan note that Tuesday will see Treasury auction “$46bn 5-Year notes, $1bn smaller than last month. Since the last auction, 5-Year yields have declined 37bp and are trading near the low end of their 3-month range, as the market-implied terminal funds rate has also fallen alongside weakening economic data. The sector appears fairly valued along the curve after adjusting for the level of rates and the slope of the curve. The WI roll opened at +0.25bp and is now trading at -0.35bp, in excess of the erosion of carry. Despite fair valuations, with the auction occurring the day before the FOMC announcement, we think risk appetite may be impaired. Moreover, liquidity remains depressed, with 5-Year market depth still near the lows of recent months. Thus, we think tomorrow’s auction will require some further concession from current levels.”
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