In the wake of Wednesday’s 20-Year supply J.P.Morgan note that ”though cheap valuations might help explain the strength of today’s auction, the sector failed to follow through richer following the result, suggesting participants likely used the auction process as a liquidity event. Moreover, primary dealer inventory in the 11- to 20-Year sector has increased by about 30% over the last month to somewhat elevated levels: thus, though dealers in aggregate only needed to absorb a bit over $1bn of today’s supply, already bloated balance sheets made it challenging for the 20s to outperform post-auction. Though the 20-year sector remains exceptionally cheap along the curve, we do not envision significant outperformance until volatility declines meaningfully, liquidity conditions improve, and until the Treasury’s August refunding announcement offers more clarity on the size of this tenor going forward.”
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