J.P.Morgan Flag Mixed Prospects For 3- & 10-Year Supply

J.P.Morgan note that "though liquidity has improved recently, reducing the likelihood of another outcome like the February 7-year auction, there are structural dynamics which are creating preconditions for more volatile auction results. The amount of duration dealers are underwriting each month at auction has doubled over the past year, given the large increases in monthly coupon–bearing auction sizes over the period. However, risk-taking capacity has not grown commensurately with the growth of the Treasury market; and this is likely driving the more variable auction results we've seen in recent months. Moreover, the expiry of temporary SLR carve-outs for Treasuries and reserves is likely to mean less robust bank demand than we previously expected, and could exaggerate these dynamics further."

• "Since the last auction, 3-year yields have declined by 4bp. Nonetheless, the 3-year sector appears fairly valued along the curve after adjusting for the level of rates and the slope of the curve, and the 3-year auction process tends to be less affected by double-auction Mondays. Thus we think the 3-year supply process should be relatively smooth."
• "Since the last auction, 10-year yields have risen 11bp and appear somewhat high after adjusting for their fundamental drivers. Still, we think 10-year supply could be somewhat more challenging to digest for the reasons discussed above." J.P.Morgan also noted that "10-year auctions occurring on a Monday tend to be met with modestly lower bid-to-cover ratios, reduced end-user demand, and larger tails."