J.P.Morgan: Position For Narrower Spreads In 7-Year Sector

Late on Friday J.P.Morgan wrote “swap spreads in intermediate maturities such as the 7-Year sector are currently wide relative to fair value. Moreover, it is worth noting that bank demand for U.S. Tsys stemming from deposit growth is one of the factors in our model for benchmark swap spreads. In the current environment, characterized by YtD deposit losses and a flat outlook at best for deposits over the remainder of the year, we estimate that bank demand for U.S. Tsys has turned negative. This persistent absence of demand for U.S. Tsys from banks will likely weigh on swap spreads and bias them narrower going forward.”

• They issued the received 7-Year swap spread trading recommendation with the swap spread trading at -28.4bp.