J.P.Morgan Look For 2-Year Supply To Be Easily Digested

Ahead of Tuesday’s 2-Year Tsy auction J.P.Morgan note that “2-Year yields are 19bp higher since the March auction and OIS forwards imply a terminal Fed funds effective rate just shy of 5.125%, in line with our expectations for a final 25bp hike at the upcoming May FOMC meeting. The WI roll opened at -5.25bp, slightly wide to our fair value estimate, and has traded around these levels since. While market expectations of near-term Fed easing have reduced somewhat over the past month as banking distress has moderated, this improvement in sentiment has been somewhat tempered by concerns over credit tightening and uneasiness surrounding rising initial claims filings. Indeed, in addition to these factors, we believe yields are biased lower due to both the historical precedent for yields to decline in the months following the last hike in a Fed tightening cycle as well as the worsening risk tone ahead of what we believe will be a contentious debt ceiling debate this summer. Given the recent increase in yields and that duration demand should remain strong in the coming weeks due to the aforementioned concerns, we believe tomorrow’s 2-Year auction will be easily digested.”