J.P.Morgan note that Wednesday will see “Treasury auction $15bn new 20-Year bonds, $2bn smaller in size from the last new auction in May. Yields have declined roughly 11bp since the July auction and are about 40bp off their highest levels in mid-June. The 20-Year sector continues to trade near its cheapest levels along the curve since the GFC, which should help keep end-user demand above-average. Furthermore, cheapness of the sector has been excessive, even after accounting for the decline in risk appetite. We’ve argued that the cheapness of the sector is indicative of the plight of the Treasury market now: amid uncertainty over the Fed’s reaction function and depressed liquidity conditions, the least liquid sectors have lost sponsorship and borne the brunt of the underperformance. At the August refunding process, Treasury cut the 20-Year auction size disproportionately more than the rest of the curve. Importantly, after this round of cuts, the 20-Year bond auction size, relative to the 30-Year size, is now in line with the TBAC’s recommendations prior to its re-introduction in May 2020 which should be supportive of new-issue auctions going forward. Against cheap valuations and a reduced auction size, we think tomorrow’s auction should continue to attract end-user demand which should allow the auction to be digested smoothly.”
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