J.P.Morgan Like Weighted Aug ‘30/Feb ’31 Steepeners

J.P.Morgan think "there are a few factors that contributed to extreme specialness in 10-year repo rates. First, end users took down 79.5% of the February new-issue auction, above the prior three-month average and near the upper end observed over the past decade. End users are less likely to lend out these issues in the repo market, leaving a smaller effective float for this issue, and thus adding scarcity value in the repo market. Second, in the momentum to higher yields in recent weeks, we think levered participants have turned more bearish on duration, increasing demand to borrow the issue in repo. Naturally this repo premium has impacted valuations: Over the last 3 auction cycles since the Fed took the funds rate back to the ELB, on-the-run 10-year notes begin to cheapen relative to double old 10s about 10 days into the auction cycle, and steadily cheapen for the next 6 weeks as Treasury reopens this issue twice. However, 10-year notes have actually outperformed by more than 1bp over the last three weeks. Thus, while the current environment indicates that 10-year notes might continue to trade special beyond next week's 10-year reopening auction, given extreme valuations we recommend initiating 99.1/100 weighted 0.625% Aug-30s/1.125% Feb-31s steepeners. Weighted spread is -1.1bp, one-month weighted carry is -1.5bp and roll is 0.3bp."