J.P.Morgan Look To Exploit Recent Cheapening Of 20s Via A Fly Structure

J.P.Morgan note that the "20-Year sector has underperformed along the curve over the past three weeks, and the 10s/20s/30s butterfly is now at its cheapest levels since mid-March. Some of this move can be explained by rising yields and a steeper curve, but we also find that the 20-Year sector has underperformed even after adjusting for these factors; 20s appear 1.5bp cheap to a 50:50 weighted 10s/30s combination after adjusting for the level of yields and the shape of the curve. Turning to security selection, we find that old 10s (1.125% Feb-31s) and 1.25% May-50s both remain rich to our par fitted curve. As such, we recommend entering 16:99 weighted 1.125% Feb-31s/2.25% May-41s/1.25% May-50s belly-richening butterflies. Weighted spread is 35.8bp. 1-Month weighted carry is 0.1bp and roll is 0.3bp."