J.P.Morgan Believe 7-Year Supply Will Require Further Concession

J.P.Morgan note that “since the August auction, 7-Year yields have risen by 100bp, to their highest levels since October 2007. Moreover, the 7-Year sector appears cheap versus the wings after adjusting for the level of rates and the shape of the curve. Further, the WI roll opened at -1.25bp, rich versus our estimate of fair value, and is now trading at -2.5bp, outperforming the erosion of carry.”

• “Despite the aggressive rise in yields, cheap valuations along the curve, and the smaller auction size, we think tomorrow’s auction may be difficult to digest given the recent volatility and decline in market liquidity over recent sessions. Thus, we think tomorrow’s auction is likely to require a further concession from current levels.”