J.P.Morgan Recommend Off-The-Run 2.75% Aug-32/3.50% Feb-39 Steepener

Late on Wednesday J.P.Morgan wrote “while broad conditions in on-the-runs were relatively stable, it appears the functioning of the off-the-run market has deteriorated further, as dispersion relative to our par curve rose into year-end, and is sitting back near levels observed in the aftermath of the regional bank failures in March 2023.”

• “However, when we dig deeper into the data, we find the rise in dispersion has not been uniform.”
• “The increase in dispersion has really been driven by the 7- to 10-year sector, sitting 1.3 standard deviations above its trailing 1-year average, while most other sectors are in line with or below their averages.”
• “Thus, it would seem that pricing of off-the-run Treasuries outside of this sector has remained relatively efficient, matching what we see for most other liquidity measures.”
• “The rise in dispersion in the 7- to 10-year sector has tracked the sharp rise in dealer inventory in the 7- to 11-year sector of the nominal curve. The rise in dealer positions has been material and is now sitting at its highest levels in 5 years.”
• “Against this backdrop, we recommend taking advantage of the cheapness of off-the-run 10s, while pairing with the richness of off-the-run bonds in the 2039 sector.”
• “In addition to relative value, this meshes with our core steepener view: the long end tends to steepen in the interregnum between the last Fed hike and the first cut, and the long end remains flat after adjusting for its drivers)”.
• As such, they recommended entering a 2.75% Aug-32/3.50% Feb-39 steepener.