J.P.Morgan Expect 7s To Be Digested Relatively Smoothly

J.P.Morgan note that Tuesday will see the Treasury “auction $47bn 7-Year notes, $3bn smaller than last month, as the sector has experienced larger cuts than neighbouring tenors. The sector appears modestly cheap along the curve after adjusting for the level of rates and the slope of the curve. The WI roll opened at +0.25bp and is now trading at -0.05bp, roughly in line with the erosion of carry. While valuations appear relatively attractive, we note that liquidity remains impaired, with 7-Year market depth still near the lowest levels of the last two years, and yield curve dispersion in the 4.5- to 7-year sector still elevated, which could make the supply process more challenging. However, given outright yields near the highs for the cycle, cheap valuations along the curve, and a smaller auction size, we think tomorrow’s auction should be digested relatively smoothly.”