J.P.Morgan Like 1.125% May-40s/3.125% Feb-43s Steepeners

J.P.Morgan note that "old 20s - the 1.125% May 2040s - richened up to 2.4bp relative to our par curve at the end of August in anticipation of the issue becoming eligible for Fed secondary market purchases. Recall that the Fed excludes on-the-runs from its POMOs and the new 20-year bond - the 1.125% August 2040s - was set to settle at the end of the month. However, the Fed has yet to purchase any of the May-2040s since it lost its on-the-run status, as valuations were rich to our fitted curve at the time of 7- to 20-year operations in Sep & early Oct. However, this issue has consistently cheapened over the last 6 weeks and now appears 1bp cheap to our par curve. We think the Fed is more likely to lean on the old 20s in its upcoming 7- to 20-year sector purchase operations; valuations are more attractive and there are limited issues in the 11- to 20-year sector of the curve that have yet to reach the 70% SOMA holding limit. Isolating relative value, we like buying the 1.125% May 2040s and selling 3.125% Feb 2043s, which we think the Fed is less likely to buy in the upcoming purchase operation. Although Feb-43s appear 1.4bp cheap to our par curve, the yield error is now modestly below its 3-month average. Given that these issues are almost 3 years apart, we also adjust for curve sensitivity: we recommend initiating 100:96 weighted 1.125% May-40s/3.125% Feb-43s steepeners."