J.P.Morgan Believe 5s Require Further Concession To Pass Smoothly At Auction

Ahead of Tuesday’s 5-Year auction J.P.Morgan note that “5-Year yields have declined 54bp since the February auction. Treasuries have run ahead of their fundamental drivers and still appear somewhat rich relative to the market’s Fed and inflation expectations as well as our medium-term growth forecasts.”

• “Furthermore, along the curve the 5-Year sector looks slightly rich on the fly after adjusting for the level of rates and the shape of the curve.”
• “Finally, the WI roll opened at -2.25bp, rich to our fair value estimate, and continues to trade near that level.”
• “As we discussed recently, we see risks beginning to skew to higher yields, with markets discounting a strong dovish response even as we are seeing nascent signs of stability in the banking sector alongside inflation still running high, and this combined with low risk sentiment amid high volatility could reduce end-user demand.”
• “That being said, we are cognizant that with liquidity at historically anemic levels, end-users could use tomorrow’s supply as a liquidity event.”
• “Thus on net with valuations looking rich, we would expect that tomorrow’s auction will require further concession to be digested smoothly, but we are aware that the results could easily be swayed by any liquidity-driven flows.”