J.P.Morgan Eye Potential Modest Tail At 3-Year Auction

J.P.Morgan note that “the mid-month supply process kicks off tomorrow, with Treasury auctioning $54bn 3-Year notes, $2bn smaller than last month. 3-Year yields have risen 16bp since the November auction and are close to their highs for the cycle. The sector appears modestly rich along the curve after adjusting for the level of rates and the slope of the curve. We think that dealers will not be encouraged to bid aggressively in this auction: liquidity has been challenged in the sector, as market depth in 3-Year notes has fallen to the lowest levels since March 2020 and delivered vol has risen to the highest levels since April 2020. The 3-Year roll opened at +4.4bp, and is trading at +4.2bp. Overall, the recent back up in yields and a smaller auction size indicates that this auction should be digested easily if end-user demand remains firm. However, we think we could see a repetition of last month’s modest tail given slightly expensive valuations along the curve and reduced liquidity, especially since dealers are likely to be somewhat risk averse.”