J.P.Morgan Suggest 3-Year Supply Will Require Concession

Ahead of Tuesday’s 3-Year auction J.P.Morgan note that “3-Year yields have declined 16bp since the December auction, accelerating lower after last Friday’s weaker-than-expected data.”

• “After the most recent moves, OIS forwards are now implying a terminal rate between 4.75-5.00%, in line with our forecasts, though we still see risks that the Fed needs to tighten more. Moreover, the market is also pricing in close to 50bp of cuts in H223 while we expect the Fed to remain on hold through Q224.”
• “Importantly, uncertainty ahead of Thursday’s CPI report could keep end-users on the sidelines, as risk appetite appears very low.”
• “Turning to valuations, the 3-Year sector appears fairly valued relative to the wings after adjusting for rate levels and curve slope.”
• “The WI roll opened at -2.5bp, in line with our estimates, and has widened to roughly -2.0bp, underperforming the erosion of carry.”
• “With valuations looking fair on the curve and risk appetite low ahead of the December’s CPI release this Thursday, we think tomorrow’s auction is likely to require a further concession from current levels.”