J.P.Morgan Dissect Thursday's Front-End Weakness

J.P. Morgan note that "after today's move, OIS forwards are once again pricing a full 25bp hike by the September 2022 FOMC meeting and 50bp of hikes by YE22. We think the market is pricing a faster liftoff path than might be warranted and continue to recommend tactical longs in 2-Year Treasuries."

• "While our understanding of the Fed's reaction function makes us sceptical of the repricing in the front end, we acknowledge that the prevailing narrative dictates that today's widening in inflation expectation pushes the front end up as the expectation would be for the Fed to raise rates earlier. However, the missing piece of the puzzle in today's move is why breakevens widened as much as they did in a session when broad commodity prices and energy prices in particular declined. The lack of fundamental catalysts in today's session suggests to us that the move was technical in nature related to TIPS auction demand dynamics, and reiterates our conviction that we'll see a repricing lower in front end yields."
• "Moreover, we think liquidity dynamics have played a role as well: market depth in the 2-Year sector has continued to drop and is now significantly depressed compared to average levels observed over the last year, even as depth in the intermediate sector has rebounded from its local lows in late summer."