J.P.Morgan Recommend Short 20s On Fly Structure

Late on Friday J.P.Morgan noted that “the 20-Year sector has continued to richen on the curve and has now fully reversed the cheapening observed over the spring and summer of 2022. The most recent leg of outperformance has taken place since Treasury’s primary dealer questionnaire in October indicated it was considering a buyback program to address liquidity conditions.”

• “Though some outperformance has been justified by the improved liquidity conditions as Treasury has right-sized 20-Year auction sizes relative to surrounding tenors, we find these latest moves have been in excess of fundamental drivers, leaving the 20-Year sector meaningfully rich on the fly adjusted for the level of 20-Year yields, the shape of the 10s/30s curve, and HG spreads.”
• “We find that the 20-Year sector appears more than 5bp rich along the curve after adjusting for these factors. Hence, we recommend initiating 52:59 weighted 4.125% Nov-32s/4% Nov-42s/4% Nov-52s belly-cheapening butterflies for relative value.”