J.P.Morgan Look For Smooth Digestion Of 30-Year Supply

J.P.Morgan note that Thursday will see the Treasury “auction $22bn reopened 30-Year bonds, unchanged in size from the last reopening auction in December. The December auction cleared at 1.895%, 3.3bp cheap to pre-auction levels despite a recovery in end user demand driven by a 5.3%-pts increase in investment manager takedown to 62.1%. Thirty-year yields have risen 17bp since the December auction and are trading near the upper end of their 6-month range. Moreover, the funded status of the largest defined-benefit (DB) pension funds has continued to improve, which could drive increased demand for long-end Treasuries. Notably, the Milliman index shows the funded ratio of the 100 largest DB pension funds rose 2.2%-pts in December to 99.6%. As a result, funded ratios rose 9.3%-pts over the year and now sit at their highest levels since the fall of 2008. In absolute value terms, the $183bn improvement in the funded status deficit is the second-largest on record, only exceeded by 2013’s $204bn improvement. Given the year-to-date move higher in yields, we believe funded ratios are now likely above 100% which should incentivize increased asset allocation away from equities and into fixed income. Given these dynamics, the 10s/30s curve now appears fairly valued after adjusting for U.S. and DM monetary policy expectations, DB pension funded ratios, as well as the pace of Fed duration purchases. Thus, with yields near multi-month highs, relative valuations somewhat more fair and the demand backdrop supportive, we think tomorrow’s supply should be digested smoothly.”