J.P.Morgan Look For Smooth Digestion Of 7-Year Supply

J.P.Morgan note that Thursday will see Treasury auction “$50bn 7-Year notes, $3bn smaller than last month as the sector has experienced larger cuts than neighbouring tenors. Since the last auction, 7-Year yields have risen 20bp and are only 6bp off the cycle highs reached last week. The sector is nearly fairly valued along the curve after adjusting for the level of rates and the slope of the curve. The WI roll opened at +0.75bp and is now trading at +0.0bp, roughly in line with the erosion of carry. Further, as we've recently noted, yield errors remain particularly elevated in the 2.5- to 7-year sector, which could translate into a larger liquidity premium for the on-the-run security that would be supportive of an easier auction process. Given outright yields near the highs for the cycle, a smaller auction size, close to fair valuations, and elevated short duration positioning, we think tomorrow’s auction should be digested relatively smoothly.”